Beware: Why This Market Darling Is a Sell

Canadian Tire Corp. Limited (TSX:CTC.A) gets a flat tire. Here’s why it won’t be pumped up anytime soon.

| More on:
Dice engraved with the words buy and sell

Image source: Getty Images.

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »