Better Retail Stock: Aritzia or Dollarama?

Although Aritzia and Dollarama are two of the most impressive growth stocks in the retail sector, is one a better investment than the other?

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Women's fashion boutique Aritzia is a top stock to buy in September 2022.

Source: Getty Images

When you first think of the retail sector, you may not think of high-quality growth stocks. In fact, many stocks in the retail sector have been struggling in recent years, especially with the rise of massive e-commerce giants like Amazon. However, two of the top growth stocks in Canada are in the retail sector, Aritzia (TSX:ATZ) and Dollarama (TSX:DOL).

Despite the fact that both stocks operate in the retail sector and both have been growing their operations rapidly and consistently for years, their two similarities end there.

For example, one of the biggest differences is the products they sell. Dollarama mainly sells household essentials and discounted goods. These are products that are essentially always in demand and could actually see an increase in demand during worsening economic environments.

On the flip side, Aritzia sells discretionary items and high-quality products that aren’t exactly cheap. When you compare it to some of the other luxury fashion brands, it offers its consumers an attractive value proposition. However, the fashion retailer still sells non-essential items that can be quite pricey for the average consumer.

Both of their growth strategies are considerably different as well. Dollarama is focused mainly on expanding its store count in Canada while improving its merchandising. In addition, it has invested in a Latin American dollar store chain with significant growth potential.

Meanwhile, most of Aritzia’s immediate growth potential is either coming from e-commerce or its expansion into the U.S., where it still has significantly fewer boutiques than it does north of the border.

So it’s clear that each of these retail stocks is a high-quality business with a tonne of potential. But which is the better stock to buy now?

Should you buy Aritzia or Dollarama stock now?

Because both stocks are high-quality companies, two prerequisites for long-term investments, and because neither is super cheap, the best stock to buy now will largely depend on your personal preferences.

Each company has grown rapidly in the past and continues to have a tonne of potential going forward. For example, in the last five years, Aritzia’s revenue has increased by 195%, and its adjusted earnings per share (EPS) are up 186%.

Meanwhile, Dollarama’s revenue has increased by 55% over the last five years, and its adjusted EPS is up 82%. And going forward, Dollarama is expected to see another significant increase in EPS next year, this time by roughly 25% year over year.

So it’s clear both stocks can grow rapidly and consistently over the long haul, making it unsurprising that they have earned investors such impressive returns in recent years.

In fact, since the start of 2020, both stocks are up over 100%, even with the pandemic’s impact on operations, and both have earned investors compounded annual growth rates of more than 18% over that stretch.

Which is the better retail stock for your portfolio?

Until recently Aritzia stock had been considerably cheaper, as investors were concerned how a worsening economy would impact both its revenue and expenses. However, after reporting promising earnings last month, the stock has rebounded substantially, and although it’s still undervalued, it’s nowhere near as cheap as it once was.

In the immediate near term, Aritzia could offer more potential as it continues to recover from a down year in 2023. At the same time, though, if the economy were to worsen again, it could see another sell-off, giving it more risk but more reward in the near term.

Dollarama stock is the safer bet in the near term due to the fact that it can see significant growth in these environments.

So, if you’re a more risk-averse investor who’s looking to protect your portfolio, Dollarama is likely the stock for you. Meanwhile, if you’re willing to take more risks now, you may want to consider Aritzia stock while you can still buy it at an attractive valuation.

Either way, if you’re investing for the long haul, both of these stocks have tremendous long-term growth potential, and they are two of the top Canadian stocks you can buy in the retail sector.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Daniel Da Costa has positions in Aritzia. The Motley Fool has positions in and recommends Aritzia. The Motley Fool recommends Amazon. The Motley Fool has a disclosure policy.

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