Retail stocks are highly dependent on consumer spending. Some of this consumer spending is essential, and some of it is discretionary. In recent years, I have been cautious about the consumer spending environment after years of strength. Which TSX retail stocks can thrive in the upcoming year?
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Artizia
It’s no secret that Aritzia’s (TSX: ATZ) stock price has been volatile. It’s also no secret that it’s trading at high valuations. Finally, my stance on the stock has also not been a secret. It’s simply hard for me to be bullish on a retail stock like Aritzia when I’m expecting a weak consumer spending environment.
This is why I have pretty much missed the boat on Aritzia. I simply determined that the risk was too high and the risk/reward trade-off on the stock was not favourable. Today, I’m still choosing to remain on the sidelines despite continued strong results from Aritzia.
In the company’s latest quarter, revenue increased 11.5% and same-store sales growth of 6.6%. This result was pretty consistent with the prior quarter, which saw a 15% increase in revenue and a 6.5% increase in same-store sales. Finally, earnings per share (EPS) came in at $0.71, once again beating expectations and showing healthy growth.
While I would not buy Aritzia stock today, I would definitely keep it on my watch list.
Dollarama
Similar to Aritzia, Dollarama (TSX: DOL) is also quite richly valued, at 36 times this year’s expected earnings. But unlike Aritzia, a large part of Dollarama’s revenue comes from “essential products,” such as household items, as well as discretionary items. This weighting in essentials makes all the difference in my view and it allows me to be more positive on Dollarama stock versus Aritzia.
Dollarama’s latest quarter reflected strength. Its sales increased 5.7% to $1.56 billion, and its same-store sales increased a respectable 3.2%. Finally, the company’s EPS came in at $0.98, 6.5% higher than the same period last year.
So, once again, while Dollarama continues to perform exceptionally well, the stock’s valuation makes me nervous, as well as its reliance on discretionary spending for part of its revenue. This brings me to the next retail stock, Loblaw Companies (TSX: L).
Loblaw
Loblaw is Canada’s leading grocery and pharmacy outlet. It is well positioned as Canada’s premier consumer staples stock, with the largest market share in the industry.
Loblaw has the benefit of being a top grocer in Canada but also of being one of the top pharmacies in Canada — both selling essentials with minimal sensitivity to economic trends. This gives the company exposure to positive tailwinds that should keep the stock performing well.
As you can see from the graph below, Loblaw stock has just recently hit new highs as the company continues to post strong results. While its latest quarter came in slightly below expectations, the stock trades at a very reasonable 19 times this year’s expected earnings.
The bottom line
When it comes to retail stocks, the consumer spending outlook is of utmost importance. If consumer spending remains high and if the consumer remains healthy, all of the stocks I discussed in this article should do well. But if the consumer weakens and turns negative, then I would favour Loblaw and Dollarama stocks.
Invest in TSX retail stocks according to your view on consumer spending.
