Many investors shy away from retail stocks during inflationary periods because of declining sales and profits. Many did not expect two prominent names in the consumer discretionary sector to deliver fat gains last year but they did. The Bank of Canada’s rate-cutting cycle in 2024 helped the retail landscape stabilize and show a semblance of normalcy.
Aritzia (TSX:ATZ) and Gildan Activewear (TSX:GIL) are must-watch retail stocks for 2025 following their one-year performance. The former rewarded investors with a 94.3%-plus return, while the latter did not disappoint with a nearly 58% gain. Both outperformed the broad market and the sector by a mile.
Surprise performance
Aritzia is a popular fashion chain and design house in Canada that is synonymous with everyday luxury. The $6.4 billion clothing retail company and its subsidiaries sell apparel and accessories for women. Its Q3 fiscal 2025 financial results should be out when this article is published.
In Q2 fiscal 2025 (three months ending September 30, 2024), net revenue increased 15.3% year-over-year to $615.7 million, while net income reached $18.2 million compared to the $6 million net loss in Q2 fiscal 2024. Jennifer Wong, CEO of Aritzia, said the second quarter performance exceeded expectations, notwithstanding a softer consumer environment in Canada.
Wong notes the positive client response to the Fall launch on both sides of the border and the strong performances of the new and repositioned boutiques. She expects the launch of the enhanced website and management’s initiatives to bolster and further accelerate Aritzia’s eCommerce business.
At $57.04 per share, this retail stock has advanced 6.9% from year-end.
Strong finish
Gildan manufactures everyday basic apparel and has been in the business for nearly 80 years. The $10.4 billion company offers activewear, underwear, socks, and other items which you can buy at physical stores and e-commerce platforms. Some global lifestyle brand companies sell them too.
So why did the retail stock finish strong in 2024? In Q3 2024, activewear and net sales increased 6% and 2.3% respectively to $788 million and $891 million versus Q3 2023. Net earnings rose 3.2% year-over-year to $131.5 million. Its President and CEO, Glenn J. Chamandy, credits the successful execution of Gildan’s Sustainable Growth Strategy (SGS) for the record third-quarter sales.
“The strength of our vertically integrated model, our proven operational excellence and our unwavering focus on executing our Gildan GSG strategy gives us confidence in our ability to deliver our full year 2024 guidance and more broadly, our three-year targets outlined earlier this year,” Chamandy said.
In addition to strengthening Gildan’s competitive position, SGS is driving top-line growth and enhancing profitability. Management notes rising market share in key growth categories, while consumers responded positively to the new products that feature innovations using the new soft cotton technology.
Gildan trades at $67.21 per share and pays a modest 1.7% dividend (31.9% payout ratio). Based on market analysts’ 12-month average price target ($75.45), the upside potential is 11.7%.
Lower inflation ahead
Aritzia and Gildan Activewear were winning investments in 2024. Both retail stocks surged in the second half of the year, following rate cuts. The test will come when consumer spending normalizes as inflation moderates.
