Most major banks and Bay Street analysts expect Canada to slip into recession sometime this year. Higher interest rates have made business investment much more difficult, which has already had an impact on wages and consumer confidence. Families across the country are tightening their belts.
The retail sector is usually the first to suffer the impact of lower consumer confidence. Some brands have seen sales decline. However, two retail stocks seem to be bucking the trend. Investors looking for a contrarian bet in 2023 should keep a close eye on these two outliers in the retail sector. Here’s a closer look.
Aritzia
Aritzia (TSX:ATZ) has delivered relentless growth over the past five years. Revenue and net income per share have expanded at a compound annual growth rate of 19% and 24%, respectively, since 2018. The team has managed to sustain this momentum in 2023 as revenue surges 48% and net income rose 22.7%.
Much of this growth stems from the company’s expanding footprint in the U.S. and its online presence. Now, the Aritzia team is doubling down on this strategy and intends to expand revenue by 15-17% annually by 2027. That could make the stock a multi-bagger.
For now, Aritzia stock is relatively undervalued. It’s down 29.8% since January 2022 and trades at just 26 times trailing 12-month earnings. Growth investors should add this underappreciated stock to their watch list.
Shopify
Shopify (TSX:SHOP) stock paints a grim picture. It’s down 76% from its all-time high in November 2021. However, much of this slide could be attributed to a readjustment of valuation. At the height of the pandemic bubble, Shopify stock was trading at an insane 60 times annual revenue — higher than most other tech or software companies.
Now that the stock price has declined the valuation ratio is much more reasonable. SHOP trades at a price-to-sales ratio of just 9.2 — far below its all-time high and historic average. It’s much more aligned with other enterprise software companies in the same sector.
Meanwhile, the underlying business is still growing. Revenue in the latest quarter was up 26% year over year, while gross merchandise value surged 13% over the same period. These growth numbers are far lower than the pandemic years but still indicate a robust business model for Shopify’s e-commerce business.
The fact that Shopify is growing, despite a recession, cements its resilience. If the economy stabilizes in the years ahead, Shopify should see further healthy growth and a return to better valuations.
New initiatives such as Shopify Capital and Commerce Components give the company additional avenues of growth. Over time, these new ventures could add additional earning power and enhance the company’s valuation. Growth investors should certainly keep an eye on this stock.
