Retail stocks have taken hits to the chin of varied magnitudes of late. Indeed, the recession, which is supposedly still coming to Canada, could eat away at consumer balance sheets. Undoubtedly, such balance sheets were already under stress, thanks to the wave of inflation that continues to stick around to this day.
Everything has gotten so expensive and in a hurry. Though inflation will likely keep moving lower from here due to the Bank of Canada’s swift action (rate hikes), the damage (high prices) from the last two years of inflation has seemingly already been done.
As inflation inches slowly back to normal and consumers begin to feel somewhat more confident, enough to splurge on that big-ticket discretionary item, I’d look for the current slate of retailers to begin to catch a bit of a break.
Defensive retail: A great risk/reward for all seasons
Now, not all retailers are created equally. Some grocery-heavy retailers are doing incredibly well. Just look at shares of Alimentation Couche-Tard (TSX:ATD), which recently hit a new all-time high, and could continue hitting new highs consistently through and after the looming recession.
The convenience store giant is already exceptionally managed. But the nature of the business has helped it endure a rather tough and perplexing macro environment.
Retailers under pressure: More risk, more reward
As for the discretionary retailers, they’ve felt more of the punch. They’re more sensitive to a recession and a shift in consumer sentiment. It’s these names that are riskiest in the face of a recession, but also the ones that tend to have the most rally power post-recession. The key is to be patient and average down into a full position. Acknowledge that you don’t know when the bottom is, and you’re probably not buying into it, and you can gradually inch your way into a position at a pretty reasonable price.
Aritzia (TSX:ATZ) is a fine example of a more discretionary play that may boom and bust based on where markets think the economy is headed. Fashionable clothing just isn’t a need to have when the going gets tough.
That said, once the tides inevitably turn and people become better able to spend money on their wants again, you can be sure that names like Aritzia stand to benefit most. If anything, a post-recession environment could allow the stock to make up for lost time, capturing demand that may have been pushed out until conditions have improved.
Which angle to play a retail rebound?
Aritizia stock is down 44% (and counting) from its peak. It’s a falling knife, but one worth catching as long as you don’t buy a full position at once. The company still has the same long-term growth runway. A recession is just preventing Aritzia stock from getting off the tarmac.
As for Couche-Tard, I view it as a safer option that could win, regardless of what the consumer will be like a year from now.
I’m a fan of both ATZ and ATD stock. If I had to choose one, it’d be Couche-Tard. Why? It’s a proven winner that always seems to find a way.
