Brick-and-mortar retail has been downright hideous over the last few years.
To take a contrarian position in one takes real guts, and although e-commerce will continue to be a thorn in the side of traditional physical retailers, there are adaptable retailers out there that can pivot and co-exist alongside their digital competitors.
This piece will have a look at two exciting retailers that could post tremendous gains in a comeback scenario. And of the two, I’ll pick one that I believe has the best risk/reward trade-off.
Indigo Books & Music
The stock of Indigo Books & Music (TSX: IDG) has completely cratered of late, with the stock now down 66% in just over a year.
The company is continuing to renovate its existing stores to drive mall traffic, and with its slow and steady U.S. expedition unfolding in the background, Indigo is a top candidate to bounce back over the next year after its brutal crash.
The Canadian economy has been rather sluggish of late, and Indigo has felt the effects as a retailer of discretionary goods. As for the decline, I’m not buying Amazon.com as the author of Indigo’s demise. The two have co-existed for well over a decade, and with Indigo’s robust e-commerce platform in place, the company is well positioned to compete on the books front.
Moreover, gifts and kids’ items are a significant source of growth moving forward, and as Indigo gets out of its rut, I think there are major gains to be had for believers in the name.
Canadian Tire
Canadian Tire (TSX: CTC.A), another one of Canada’s iconic retailers, has been in the doghouse of late. The stock shed well over a quarter of its value over the last year and is now sporting the highest yield in recent memory at 3.1%.
Management has made it clear that it’s willing to spend money to build upon its portfolio of exclusive brands. While exclusive branding of various discretionary goods is a great way to offset pressures from digital retailers, I ultimately believe that Canadian Tire ought to focus its investment dollars on heavy-duty pieces of equipment and home hardware items, which are better suited for physical retailers.
In the end, Canadian Tire is a brick-and-mortar player at heart. The further it moves into goods that are easily shippable, the more I question the width of the company’s moat. At the time of writing, the stock trades at 10.5 times forward earnings, which is pretty cheap, especially if you think the Canadian economy will pick up in 2020.
And the better buy is?
Indigo is the bolder bet with far larger potential rewards, but make sure you’re not a stranger to volatility. The stock is on unstable footing right now and could suffer another drop before it comes time to recover ground.
Indigo stock is ridiculously cheap at 0.17 times sales, though, and is priced to go belly up, which I don’t think is plausible at this juncture. If Amazon were to have its way with the book retailer, it would have many years ago, so it the e-commerce headwind thesis, I believe, doesn’t hold in 2019.
