Consumer spending seems to be in a vulnerable spot, with a recession likely just months away. With a robust job number, many may wonder just how much of a hit the consumer will take. In times of recession, discretionary spending tends to take the biggest hit to the chin. Still, signs have been quite mixed thus far, with various firms like Aritzia (TSX:ATZ), a women’s clothing retailer, continuing to post solid numbers that do not suggest an economic downturn is closing in.
Undoubtedly, many firms have begun to trim away at costs in response to rising interest rates. Economic growth could certainly stall, as layoffs in white-collar segments begin to mount. Indeed, a strong jobs number could precede a weak one. It’s hard to tell at this juncture, but there’s a strong sense of unease among investors as we move into the second half of the first quarter.
On the whole, expectations aren’t all too high. As China reopens from recent COVID lockdowns, there’s a good chance that the impact of the reopening could spread to other parts of the globe, perhaps offsetting some of the economic pressures that a recession will bring in.
The mixed state of the Canadian consumer ahead of a potential recession
Only time will tell how the consumer fares going into year’s end. Regardless, I think some discretionary firms are better suited than others to make it through a likely mild recession.
Aritzia is just one of the hot retailers that can take share away from industry rivals. As the company moves into the U.S. market, it’ll be the hot new player that will be competing for discretionary income. Thus far, the results have been encouraging, with the firm posting record revenues in its third quarter.
The state of the consumer is confusing, to say the least. In any case, Aritzia stock has been sagging lower in recent weeks. The stock is down around 28% from its all-time high, likely because investors don’t think consumers will hold up as the recession rears its ugly head.
I think Aritzia can continue to buck the trend. And if the next downturn is, in fact, short-lived, I expect ATZ stock could be among the first to recover. At 26.6 times trailing price to earnings (P/E), I think you’re getting a very strong company with a long growth runway at a very modest multiple.
Another discretionary stock that could surge in a consumer-spending rebound
Leon’s Furniture (TSX:LNF) is another discretionary retail play that’s attempting a comeback, now up 31% from its July bottom. Indeed, there’s room to run (around 22%) if the name is to reach top again. Regardless, I think investors underestimated the consumer and the secular trend that could lead to robust, long-term demand for the furnishing retailers.
The company delivered two straight quarterly earnings beats. The latest number (third quarter) saw earnings per share of $0.87, beating the $0.72 estimate. I still think estimates are a tad muted, as Leon’s looks to power through a choppy environment. A recession and inflation are still sore spots for such a discretionary. However, I think the headwinds have been baked in at this juncture. At 4.4 times price to cash flow (P/CF) and 7.2 times trailing P/E, Leon’s seems already priced with a recession in mind.
In any case, I expect Leon’s will be quick to get back on its feet again if 2023 does see a consumer resurgence.
Don’t underestimate the strength of the consumer. A mild recession may not be able to derail discretionary spending in the way that recent stock action suggests.