The retail industry has really felt the macro pressures in recent quarters. Undoubtedly, a recession isn’t a guarantee at this juncture. But it certainly feels like firms may be able to manage their way out of the rising macro and industry woes to come.
It’s never easy to be in the retail space when the economy takes a bit of a hit. Regardless, it’s the anticipation of a bad downturn that may be worse than the actual thing. Further, not all retailers are bound to suffer a huge plunge. Some are better managed than others, with a mix (think less discretionary, more staples) of merchandise that can weather a particularly bad storm.
In this piece, we’ll look at two Canadian retailers that I think could withstand a Canadian recession, which could arrive at some point over the next year or so. Without further ado, let’s consider shares of discount retail top-dog Dollarama (TSX:DOL) and discretionary retailer Canadian Tire (TSX:CTC.A).
Dollarama
Dollarama stock’s incredible run could continue well into the second half of 2023. Year to date, the stock is up just north of 10%. Over the past year, shares are up a respectable 15%. Indeed, high levels of inflation have pushed many Canadian consumers to some of the lower-cost retailers out there. When it comes to saving money, it’s tough to stack up against the value proposition of the likes of Dollarama.
Undoubtedly, DOL stock doesn’t look that cheap, with shares going for over 30 times trailing price-to-earnings. It doesn’t deserve to be cheap, though, given the environment that favours retailers with strong value propositions. Even though inflation is en route to being tamed by Bank of Canada rate hikes, I don’t expect Dollarama will experience any sort of hangover once the recession passes and consumers have a bit more disposable income in their wallets.
As Dollarama continues its expansion, I expect earnings to grow at a consistent rate over time. Though I wish the stock was cheaper, I’d not be afraid to buy a small starter position at around $88 per share. If a recession rocks the economy, I don’t expect Dollarama stock will feel it nearly as much as the broader averages. In that regard, Dollarama’s a great defensive growth stock that can hold up in stormy conditions.
Canadian Tire
If you seek a greater bang for your buck, Canadian Tire stock may be a more interesting option to consider right now. Shares trade at 12.5 times trailing price-to-earnings, well below that of Dollarama. Although Canadian Tire sells a great deal of big-ticket discretionary goods, I must say I’m impressed by the company’s ability to bring aboard new brands, some of which are less discretionary (think pet food, consumables, and other necessities).
Add the Triangle program into the equation, and I do think Canadian Tire is a relevant retailer that will be there for Canadian consumers when they’re ready to shop again.
Canadian Tire stock has been in rally mode of late, surging over 26% year to date. Even with a recession ahead, I think the stock is cheap enough to sail through the next year without enduring too much damage. Expectations are modest, and management may have what it takes to manage through a few quarters of mounting macro headwinds. With a 3.73% dividend yield, CTC.A stock is an intriguing value option for the income-savvy.
Better retail stock to buy now?
I’m a bigger fan of Canadian Tire stock, thanks to the lower multiple and juicy dividend yield. Expectations are too low ahead of a recession that may be historically mild.
