An economic recession seems to be getting less likely as time goes by. Undoubtedly, the latest wave of earnings results hasn’t been stellar and better than the estimates. Still, there are conflicting signals growing (at least in the U.S.) that may cause some pundits and strategists to call off their predictions of a mild to moderate economic downturn.
Even if the consumer stabilizes at a quicker rate than expected, there’s no denying the headwinds in the rearview. Most notably, high inflation has weighed on our budgets and has helped fuel our appetite for bargains. Indeed, that’s a major reason why seasonal sales (think Prime Day) have been hot of late.
In this piece, we’ll have a second look at two Canadian retailers that have already been through a lot. Though a Canadian recession could bring more pain to the following lagging retail plays, I’d argue that the next three to five years look bright for value investors who are willing to roll with the punches in the choppy retail sector.
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Value in the retail space
Without further ado, please consider shares of women’s clothing retailer Aritzia (TSX:ATZ) and toymaker Spin Master (TSX:TOY). Both are highly discretionary plays, meaning they sell nice-to-have goods that tend to sink in demand at the first signs of economic turmoil. As consumer sentiment improves after (or potentially through) a coming Canadian recession, I’d look for the following stocks to bounce quite sharply.
Understandably, a jittery investor would probably get better sleep by investing in the following discretionary retail plays after a remarkable quarter confirms the Canadian consumer is resilient enough to sustain a recovery.
However, I think investors getting in now, while things are uneasy, will be the ones that stand to gain the most from a turnaround. Buying downside momentum may not be for everyone. But if you’re young and seek to build wealth over the next three years or more, the following plays have risk/rewards trade-offs that seem too good to pass on!
Aritzia
Aritzia stock was hit with an absolute sledgehammer when it reported its latest underwhelming quarter. Store traffic is slowing down in a major way, and that’s had quite an effect on earnings. Still, I view the pressures as having more to do with the state of the macro environment and less to do with management’s moves. The company is still in growth mode. But as a discretionary, it’ll have to take a few backward steps en route to a post-recession economy.
The stock is now dirt cheap at 17.05 times trailing price to earnings. Once the consumer is ready to splurge again on Aritzia’s hot fashions, I suspect many Canadian investors will look past the vicious plunge. The stock’s down more than 58% from its high. I think it’s a buying opportunity for the courageous.
Spin Master
Spin Master stock has been going range bound for 2023, swinging between $30 and $38. Today, shares are closer to the high end of the range at $36 and change. The company saw sales slip in its latest second quarter.
As a discretionary retailer, I view the slip as primarily due to the macro. Order volume has been sluggish, but I believe it’s a mistake to write off the coming holiday season as a dud, especially if no recession lands by then.
At 13.8 times trailing price to earnings, Spin is a deep-value play that may already have the worst of recession headwinds baked in. The stock is down 38% from its 2018 high, just shy of $59 per share.
