There are few retail stocks that investors would feel completely safe buying. After all, during a downturn Canadians tend to turn away from discretionary spending. Yet when it comes to Canadian Tire (TSX:CTC.A) and Dollarama (TSX:DOL), it’s a bit different.
Not only are these companies proven Canadian legends, they’ve also proven they are indispensable during an economic downturn. Each provides low-cost options for Canadians when they need to buy items. But, which is the better buy? Let’s get into it.
Case for Canadian Tire stock
Canadian Tire is one of Canada’s most iconic and diversified retail companies. Founded in 1922 by brothers J.W. and A.J. Billes, it began as a tire and automotive service company. Over the decades, it has expanded its offerings to include automotive parts, accessories, tools, hardware, home goods, sporting goods, and outdoor living products. It now operates through a network of over 1,700 retail and gasoline outlets across Canada.
There are a few reasons the company is also a strong investment. Canadian Tire operates in several sectors including retail, automotive, financial services, and apparel through its various subsidiaries like SportChek, Mark’s, and PartSource. This diversification can help mitigate risks associated with fluctuations in any single sector.
Furthermore, as a well-established retail brand in Canada, Canadian Tire has shown resilience over the years, adapting to changing consumer preferences and economic conditions. Its wide range of products and services caters to diverse customer needs. And don’t forget customer loyalty. What’s more, the stock has seen growth through e-commerce, with strong financial performance and a history of paying out dividends.
However, the stock has been more sensitive to economic conditions. During downturns, Canadian Tire sells many items deemed not essential. This leads to a drop in revenue and share price. Furthermore, Canadian Tire relies on efficient supply chain management to ensure the availability of products in its stores. Disruptions in the supply chain, such as transportation delays or inventory shortages, could affect sales and customer satisfaction.
Case for Dollarama stock
Then there is Dollarama stock. Dollarama is a Canadian chain of retail stores known for selling a variety of everyday items at low prices. It operates on a fixed-price model, whereby the majority of items are priced at $4 or less. The company offers a wide range of products, including household items, kitchenware, cleaning supplies, snacks, party supplies, toys, and seasonal merchandise.
While not 100 years old, founded in 1992, Dollarama has experienced significant growth over the years. It has expanded its store network across Canada and operates over 1,300 stores in all 10 provinces. Furthermore, by maintaining a low-cost operating structure and sourcing products efficiently, the company is able to offer value to customers while maintaining healthy profit margins.
What makes it great for investors even today is that discount retailers like Dollarama often perform well during economic downturns as consumers seek value-oriented shopping options. Dollarama’s low-price model and diverse product offerings may continue to attract customers during challenging economic conditions. And it offers just as much customer loyalty as Canadian Tire.
The only real issue now is that perhaps Dollarama stock is out of room to grow. As a mature company operating in a competitive market, Dollarama may have limited upside potential compared to younger companies in high-growth industries. Investors seeking high-growth opportunities may find other investment options more appealing. What’s more, there is a lack of online presence, keeping it out of the e-commerce market.
Bottom line
During an economic downturn, Dollarama has proven to be a clear winner. It continues to keep costs low, expand store locations, and increase sales from consumer staples. Canadian Tire just doesn’t have the consumer staples that Canadians need.
However, Canadian Tire does offer growth from its popular automotive sector. And that’s unlikely to change. When the market returns to normal, the retailer could enjoy stunning growth. But for now, I would stick to Dollarama stock for consistent and growing earnings.
