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Should Investors Avoid Retail Stocks?

The retail industry is getting more competitive, and with growth difficult to come by, investors may be wondering if it’s even worth investing in. Although we’ve seen some big departures in recent years, and many companies continue to struggle, the ones that are left standing have survived the harshest of tests. The problem is that with limited growth, tight margins, and often little in the way of dividends, there might not be a whole lot of reason left to invest.

Dollarama (TSX:DOL) is a great example of a company that’s struggled over the past year with growth rates starting to taper off and the discount retailer finding it difficult to find a way to convince investors it’s still a good buy. Even though it appeals to price-conscious consumers, many have complained that its prices have become too high given that the dollar store tops out at $4 items.

However, for a company like Dollarama to find growth while producing a profit at a time when minimum wages are going up, focusing on higher-priced items is one way to help boost both the top and bottom lines for the company.

A company like Loblaw Companies (TSX:L), which recently released its quarterly results and showed a very nominal 3% growth in sales, is running into similar issues. Although it doesn’t have to worry about pricing items close to a dollar, it too is starting to feel the pinch. In its most recent earnings report, the company’s pre-tax profits were down from a year ago, as it has seen its costs continue to rise as well.

Retailers have been forced to make changes to stay competitive

Both Loblaw and Dollarama have tried to make themselves more competitive with online retailers by offering consumers online shopping options. However, Dollarama’s website offers bulk shopping options, which are not going to make sense for most of its customers, and other online retailers might have more selections that don’t require bulk purchases. For Loblaw, its online shopping option and the ability to pick up orders may have a bit more appeal, but it too feels sub-optimal, and it clearly hasn’t resulted in big sales growth for the company.

It’s perhaps not a surprise that there have been recent news articles talking about Loblaw pushing customers to use self-checkout lanes rather than cashiers, as that’s one way where the company can drive value, by improving its margins and reducing costs. There’s definitely been a noticeable increase of self-checkouts at some Loblaw stores I’ve been to recently, and it’s something we may see more of as the company tries to find a way to add to its profit.

Bottom line

Both Dollarama and Loblaw have been making efforts to try and grow their sales and improve their financials. However, it’s clear that more work still needs to be done for that to happen. And the problem is, in a few years retailers could be facing even more challenges and more pressure to become more efficient. Things are not getting any easier in the industry and while I don’t see Dollarama or Loblaw disappearing any time soon, I find it difficult to justify investing in either stock given how difficult and competitive the industry has become.

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Fool contributor David Jagielski has no position in any of the stocks mentioned.

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