The holidays are just around the corner, and you know what that means: shopping!
Each and every year, Canadians spend a little more on Christmas than they did the year before, which contributes to abrupt revenue surges at certain companies that exhibit high seasonality. In this article, I explore three TSX stocks set to benefit from the Holiday shopping surge.
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Canadian Tire
Canadian Tire (TSX: CTC.A) is a classic example of a company whose earnings tend to spike as a result of Christmas shopping. As a vendor of outdoor products, such as bikes and car/ATV accessories, its revenues and earnings often spike in December or September, as people get a head start on Holiday shopping.
How is Canadian Tire doing as a business this year?
Pretty well, it seems. In its most recent quarter, the company grew its revenue 6.7% and its earnings by 24.5%. Over the last five years, CTC.A has compounded its earnings at about a 6% CAGR. The company also boasts healthy if not mind-blowing margins: a 4.3% net margin and a 4.5% free cash flow (FCF) margin.
Dollarama
Dollarama Inc (TSX: DOL) is a retail name you might be surprised to see on this list. Dollar stores are best known for thriving during recessions and periods of mass unemployment; why would they benefit from Holiday shopping amid this fairly strong economy? Christmas shopping tends to revolve around high priced items, and dollar stores sell cheap items.
One word: stockings.
Although the biggest gifts people receive under the Christmas tree are usually fairly pricey, the tradition of parents giving their kids “stocking stuffers” aligns well with Dollarama’s business strategy. Stocking stuffers usually consist of inexpensive items such toothbrushes, soap, cosmetics, candy, which are exactly the kinds of fare that Dollarama specializes in. So, DOL, which is already growing same-store sales at 4.9% year over year, may get a surprise boost from Christmas shopping.
Air Canada
Air Canada (TSX: AC) is a natural beneficiary of the Holiday surge, being a travel company that transports Canadians and others around the world. Canada’s flagship airline, Air Canada, has the most international routes out of all Canadian passenger carriers.
During the Holiday season, it’s quite common for Canadians to travel domestically (to visit relatives) and internationally (to beat the Winter cold). Some of Air Canada’s most popular Holiday vacation packages, therefore, are to places like Mexico, the Caribbean and Central America. Air Canada has considerable expertise in operating these long distance routes, which gives it an advantage over competitors like WestJet that operate mainly domestically.
Air Canada is a pretty cheap stock at today’s prices, trading at just 16 times earnings, 0.28 times sales, and 2.5 times book value. These multiples are all far lower than the market averages today. Now, investors believe that AC’s ongoing capital expenditure (CAPEX) cycle is a risk to the company, which is aiming to do more than $6 billion per year of such expenditures over the next few years. However, airplanes tend to have long useful service lives: 20 years or more. So, the spending will probably not sink Air Canada, which looks set to be earning more in five years than it is earning now.
