The broader retail sector is a pretty ugly place to be right now. Still, not all retailers have been feeling the pains brought forth by high inflation and macro headwinds. Indeed, discount retailers have actually received a bit of a jolt amid the rush to save a buck or two. Meanwhile, more discretionary retailers, especially those that sell pricier, upscale goods, have been feeling the hit of the current economic climate.
Moving ahead, rates are likely to stay high, and they could settle in a range that’s just a tad higher than where they sit today. Indeed, that thought has been weighing heavily on investor sentiment, especially for the more expensive technology firms, many of which have been off to the races for most of the year!
At this juncture, it only seems like high-quality, necessity-heavy retailers are worth owning going into year’s end. Still, the economy won’t stay in a funk forever. And if the Canadian recession isn’t a brutal one, today’s battered discretionary retail plays may actually prove undervalued today, even if the recession is still a couple of months away.
Indeed, once stocks get punished, they tend to get punished severely. And in the case of certain high-quality retailers, I think the punishment is overdone, given the magnitude of headwinds ahead.
In this piece, we’ll check out two very different Canadian stocks from different corners of the retail scene.
Aritzia
Aritzia (TSX:ATZ) is a women’s clothing retailer that has done well when the consumer has plenty of disposable income on hand. Nowadays, the tables have turned, and the stock is in one of its worst ruts yet.
Despite being a painful stock to be in, I have the utmost confidence in management’s abilities to pick up where they left off once Canada’s economy is ready to heat up again. At the end of the day, Aritzia’s clothing items are still fashionable. They’re just a bit too pricey for your average consumer, who may be more inclined to tighten the purse strings.
The so-called “roaring 20s” are all but over. Now, Aritzia needs to navigate a turbulent environment while continuing to push through with its American expansion. I think ATZ stock is a long-term winner that could be stuck in the penalty box for a few more quarters.
After a 63% implosion, the stock goes for 15.2 times trailing price to earnings. Despite the modest multiple, do be mindful that shares are a falling knife right now. As such, be ready to roll with the punches!
Dollarama
While Aritzia stock was in pain, Dollarama (TSX:DOL) shares have been steadily moving higher. Today, the stock’s just 2.5% off its recent high. Despite the more than 17% year-to-date run, I still view shares as modestly priced at just north of 30 times trailing price to earnings. Further, the discount retailer is one of the names that seems unshakeable going into a potential Canadian recession.
Of course, the latest September spike could see a further reversal. If shares fall to or below $90 per share, I’d think about initiating a sizeable position for the long term. There aren’t that many high-quality, recession-resilient growth plays out there that can offset the headwind of high rates. Dollarama stands out as one of them.
Better buy: ATZ or DOL stock?
At this juncture, I like Aritzia more. The stock is too oversold, and its long-term growth prospects are discounted.
