Is Now the Right Time to Buy Consumer Discretionary Stocks?

These consumer discretionary stocks have strong potential for growth and are likely to deliver outsized returns.

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The macro headwinds continue to pressure consumer discretionary spending. However, with inflation showing signs of easing, consumer discretionary spending could rise in the coming quarters, giving a significant lift to the shares of the companies operating in this space. Further, the recent pullback in consumer discretionary stocks provides a good entry point near the current levels.

Against this background, let’s zoom in on two Canadian stocks that could gain significantly from higher consumer discretionary spending. 

Aritzia

Aritzia (TSX:ATZ) is a top Canadian fashion house that commands a market cap of $4.63 billion. While fear of an economic slowdown has weighed on investors’ sentiment and led to a pullback in Aritzia stock, this consumer company continues to deliver solid sales and earnings, making it an attractive long-term bet. 

Even with continued pressure on consumer spending, Aritzia witnessed strong demand for its offerings. Its revenues marked an increase of 48.3% in nine months of fiscal 2023. At the same time, Aritzia’s adjusted net income per share jumped by 22.7%. Its ability to deliver profitable growth in an adverse macro environment shows the resiliency of its business model. 

While most retailers relied on promotions to support sales, Aritzia has benefitted from its solid mix of full-priced sales. Also, its boutique expansion strategy in the high-growth U.S. market and omnichannel offerings paid off well. 

Looking ahead, Aritzia expects the momentum in its business to sustain. Moreover, the uptick in consumer discretionary spending could accelerate its growth. Aritzia projects its revenues to grow at a CAGR (compound annual growth rate) of 15-17% through 2027. Meanwhile, its net income per share is forecasted to grow faster than its revenues. 

The ongoing momentum in its business, solid growth outlook, and continued boutique expansion are likely to push its stock price higher. Also, an improvement in the macro environment will likely boost its financials and share price. 

Canada Goose

Canada Goose (TSX:GOOS) is a leading lifestyle brand that manufactures performance luxury apparel. The macro headwinds in North America and COVID-19-related disruptions in Mainland China weighed on the company’s financials. Given the challenges, Canada Goose stock dropped over 23% in one year. 

Nonetheless, Canada Goose sees these challenges as temporary and expects its brand strength to drive profitable growth. During the third quarter conference call, the company stated that the easing of COVID-led restrictions in China is leading to an acceleration in growth. Moreover, it has started to see promising signs of a strong local rebound. 

Its DTC (direct-to-consumer) business will likely get strong support from improved consumer discretionary spending. Moreover, recovery in Mainland China and retail store expansion will drive its DTC sales. Also, higher pricing and tight control over non-strategic spending will help cushion margins. 

Canada Goose continues to invest in innovation and the introduction of new products, which augurs well for long-term growth. Its stock is trading at the next 12-month price-to-earnings ratio of 19.4, which reflects the significant discount from its historical average of about 40, providing a solid entry point at current levels.  

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 Sneha Nahata has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Aritzia. The Motley Fool has a disclosure policy.

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