It’s easier to compare two stocks from the same sector/industry than stocks from different industries because, apart from financials, you also have to take into account context and correlate industry dynamics. Let’s see how this logic applies to two retail stocks.
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A diverse retailer
Canadian Tire (TSX: CTC.A) cannot simply be called a diverse retailer, even though that does accurately portray its retail makeup. The company has five different retail divisions, with three (Automotive, Living, Seasonal and Gardening) making up over 68% of the revenue. This diversification is a major strength of Canadian Tire.
The company has other strengths as well, like being the second most visited digital store in Canada (even though digital visits declined between 2022 and 2023) and a massive portfolio of over 300 business categories. They also have a strong loyalty system with over 11.4 million users, which gives their model more resilience via repeat business.
As for the financials, the revenue has modestly declined in the last three quarters, but the net income and gross profit have increased for the same period. The debt-to-equity ratio is healthy but not excellent.
Now, let’s look at the performance. This is one area where the stock doesn’t impress much. Its price grew 10% in the last five years and over 30% in the last 10. The overall returns are decent (75% in the last 10 years) thanks to its dividends.
The company is an established aristocrat, and it’s offering dividends at a 4.5% yield with a healthy payout ratio. Its dividends and valuation are the main reasons for considering this stock.
A discount retailer
Dollarama (TSX: DOL) is one the largest dollar store/discount retail chains in Canada as well as one of the fastest-growing retailers in the country. It had 44 stores/locations in the country in the early 90s and acquired about 60 more locations in the early 2000s. In the last quarter century (almost), the company has grown this number to 1,601 in Canada and is aiming for over 2,000 stores by 2031.
It’s also growing its presence in Latin America, specifically Peru, and already has about 588 stores in the region and plans to expand this number to over 1,000 by 2031. As for financials, the revenues and gross profits are consistently growing. Its debt ratio is healthy as well.
If we look at the dividends, Dollarama is not even in the same league as Canadian Tire yield-wise, though it is an aristocrat. Its current yield is 0.26%. However, performance-wise, Dollarama is miles ahead of Canadian Tire, with its price appreciating by 200% in the last five years and over 600% in the last decade, though it is overvalued comparatively.
Foolish takeaway
Both stocks have strengths. CTC is a strong dividend stock, and Dollarama is a growth powerhouse. However, in the long term, your overall returns are likely to be much higher with Dollarama than Canadian Tire, even if the stock severely underperforms (like half of its last decade’s performance in the next decade). The comparison leans even more in Dollarama’s favour if the bull market phase continues long term.
