The macro uncertainty, rising interest rates, and high inflation continue to pressure consumer discretionary spending and shares of the companies operating in this space. However, the pullback in consumer discretionary stocks provides a solid entry point for long-term investors. Further, the easing of inflation and an improvement in the economy could give a significant lift to the shares of these companies.
Against this background, let’s look at top Canadian stocks that could gain, as consumer discretionary spending improves.
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Aritzia
Speaking of top stocks in the consumer goods industry, one could consider adding the shares of lifestyle apparel company Aritzia (TSX: ATZ) near the current levels. It has been consistently growing its sales at a double-digit rate, reflecting strong demand and a favourable mix. Meanwhile, the company is profitable. Thanks to its stellar financial performance, Aritzia stock jumped over 135% in three years.
However, Aritzia stock recently took a hit following the fourth-quarter financial results. Tough year-over-year comparisons and margin headwinds are likely to hurt its near-term financials, leading to a decline in its share price. This dip provides a solid buying opportunity for investors with a long-term view.
Aritzia’s fundamentals remain strong, while the demand for its products sustains. The company sees its top line growing at an average annual growth rate of 15-17% through 2027. At the same time, its earnings growth is forecasted to outpace sales.
Management’s strong medium-term sales and earnings guidance reflect the strength of its business model. Strong demand, new boutique openings in the domestic market, expansion in the U.S., and continued investments in brand building and e-commerce will likely accelerate its growth and drive its share price higher. Further, Aritzia stock is trading at the next 12-month (NTM) price-to-earnings multiple of approximately 26, which is well below its historical average of over 32, making it attractive on the valuation front.
Canada Goose
Canada Goose (TSX: GOOS) is Canada’s leading lifestyle brand, focusing on luxury performance apparel. The ongoing macro headwinds in North America and disruptions related to COVID-19-related in China have weighed on its performance and, in turn, its stock price. However, Canada Goose stock witnessed a bit of recovery and is up more than 16% year to date.
While macro weakness could pressure its revenue and earnings in the short term, management sees these challenges as temporary. Further, easing COVID-led restrictions in China will likely support its top line. Also, its brand strength, partnerships and collaborations, and diversification of product mix are likely to accelerate its growth.
Canada Goose’s luxury brand positioning, expansion of the direct-to-consumer network in the domestic market, new product introduction, and rebound in China augur well for long-term growth.
Its stock is trading at a forward price-to-earnings ratio of 22.2, which is much lower than its pre-pandemic levels of about 40, providing a solid entry point at current levels.
Bottom line
Both Aritzia and Canada Goose have solid long-term growth potential. However, a weak macro environment could continue to weigh on their financial and operating performance in the short term. Thus, investors with a long-term view should consider investing in the shares of these consumer companies.
