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Beware: Why This Market Darling Is a Sell

It’s tough to justify the ownership of retail stocks these days.

With the rise of e-commerce, competitive pressures are mounting, and they’re not about to slow down anytime soon. When it comes to iconic Canadian retailers like Canadian Tire (TSX:CTC.A), is there any way it can return to its former glory? Or is it going to continue to be a struggle to retain to stay upright as it’s forced to compete in the arena of digital retail?

A tale of an eroding moat

Canadian Tire has an extensive footprint across the country, and many prized exclusive brands that serve as components of the firm’s moat. In recent years, however, Canadian Tire’s moat has narrowed thanks mainly to the rise of up-and-coming digital competitors. The company has been scrambling to fight the competition with an e-commerce platform of its own alongside a loyalty rewards program named Triangle.

With such a massive footprint of physical stores across all its banners, Canadian Tire will always be a brick-and-mortar retailer at heart. Unless Canadian Tire can transform its business to become more of a home improvement play (which is more brick-and-mortar-oriented by nature) like Home Hardware, I think Canadian Tire will continue to feel the pressure brought forth by on by various e-commerce competitors.

Management is on the right track by acquiring exclusive brands to bolster its namesake brand, but the acquisition of “stuff that could easily be sold online” like Helly Hansen apparel or a partnership with Petco for pet food isn’t the right way to win back investors who’ve ditched the stock to the curb over the past year. Even if Helly Hansen proves to be the next big thing in outerwear, such a perceived main attraction may not be a sustainable driver of in-store traffic as such branded merchandise can easily be bought online.

I’m not a fan of Canadian Tire’s trajectory, and think the stock could be headed much lower from here (it’s currently down 23% from all-time highs), as foreign brick-and-mortar chains (like French sporting goods chain Decathlon) continue moving into Canadian Tire’s turf as fellow Fool Will Ashworth pointed out in his prior piece.

“I’ve always found Sport Chek stores to be poorly managed, so I expect Montreal-area consumers are going to be in for a treat when Decathlon opens in a couple of weeks,” said Ashworth. “Sport Chek might have a significant advantage over Decathlon at this stage of the game, but it had better not sit on its laurels, or its near-monopoly position will be snatched from under it. And that would be very bad for Canadian Tire stock.”

I hate to admit it, but my colleague is absolutely right.

Canadian Tire is in the crosshairs of some pretty scary competitors that look ready to steal its lunch money. Decathlon disrupting Sport Chek at home is just one move that could clobber the chain’s same-store sales growth (SSSG) numbers over the long haul. And as Canadian Tire ramps up its e-commerce efforts, it could ultimately be a brick-and-mortar competitor that could bring Canadian Tire to its knees.

As for Sport Chek stores being poorly managed, I can’t say I disagree based on my own experiences.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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