The Canadian stock market has seen solid gains over the last year as the TSX Composite benchmark currently trades with 22.4% year-to-date gains. With inflationary pressures easing and interest rates declining, many Canadian retail stocks are on investors’ radar as we approach 2025.
Before I highlight a top Canadian consumer retail stock with strong growth potential for 2025, let’s look at how these favourable macroeconomic trends could help the retail sector gain strength in the coming years.
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What could help the Canadian consumer retail sector outperform
After the COVID-19 pandemic forced countries to adopt strict lockdowns in 2020, the Bank of Canada kept interest rates at historically low levels to support economic recovery. However, low rates led to a surge in consumer demand, which, combined with supply chain disruptions, contributed to high inflation.
To fight inflationary pressures, the Canadian central bank implemented a series of interest rate hikes between 2022 and 2023, temporarily hurting consumer spending and retail growth. Now, with easing inflation and declining interest rates, the Canadian retail sector could see a recovery. This is primarily because lower rates make borrowing more affordable for consumers, encouraging spending on both discretionary and non-discretionary items.
In addition, easing inflation helps stabilize product prices, which boosts consumer confidence and their purchasing power. The combination of these two key factors is likely to create a more favourable environment for the retail sector in 2025 and beyond.
A top Canadian retail stock to buy for 2025
While there are several strong contenders in the Canadian retail space, one stock that stands out for its growth potential in 2025 is Canadian Tire (TSX:CTC.A).
On the one hand, shares of many other retail companies like Aritzia and Metro have outperformed the broader market so far in 2024. On the other hand, Canadian Tire stock has lagged behind with only 10% year-to-date gains. With this, it currently trades at $154.72 per share with a market cap of $8.8 billion. In my opinion, Canadian Tire’s relative underperformance in 2024 presents an attractive opportunity for long-term investors.
Another fundamental factor that makes Canadian Tire an attractive stock is its diverse business model, which spans multiple retail categories, including automotive, hardware, sports, and home goods.
Although some headwinds due to weak consumer spending have affected parts of the retail sector of late, Canadian Tire is continuing to showcase resilience through strategic initiatives and operational efficiency. For example, in the most recent quarter ended in September 2024, Canadian Tire delivered strong profitability despite a slight dip in its comparable sales. The company reported a solid 21.3% year-over-year increase in its adjusted earnings to $3.59 per share with the help of cost-control measures and a focus on high-margin product categories. In addition, its automotive and sports categories have shown strength due to strong demand for automotive services.
A favourable macroeconomic environment further brightens Canadian Tire’s outlook for 2025 and beyond, making its stock attractive for the long term. Besides that, its attractive annualized dividend yield of 4.5% makes it even more appealing for income-focused investors.
