As we emerge from our long lockdowns, Canadians will spend, spend, spend and retail stocks risk to profit. With 75% of the country receiving at least one Covid vaccination, including 25% of the nation being fully immunization, Canada is finally reopening. In 2020, Canadians squirreled away $212 billion in savings, compared to $18 billion in 2019. That works out to $5,574 per wallet vs. $479 or an astonishing 12 times more year over year. That means the savings rate leapt from 1.3% of disposable income in 2019 to 14.9% in 2020. If you were fortunate to maintain a constant stream of income, then you’ve paid down your credit card debts and boosted your credit scores. So, where will Canadians spend and what stocks should investors buy to capitalize?
Good luck walking past any Winners or Marshalls store these days. In Toronto, 30-minute lines snake outside these shops, which offer markdowns on clothes and household goods. While essential retailers, Dollarama in Canada and Dollar General in the States, remained open during the pandemic, discount retailers under TJX endured long closures, such as mid-November to just recently in Ontario. While this will impact TJX earnings for the first half of 2021, the top and bottom lines should explode going forward.
Okay, I hear you say, provincial law dictates that shops operate at only 15% capacity, which is a fair point, but the U.S. is nearing 50% full (two-shot) vaccination, and Canada is pushing hard to leap from its 25% rate. Taking the U.S. as a harbinger, then Winners will allow more customers in the coming weeks.
I predict demand to remain steady over the summer from customers who have saved money, but also from those struggling to make ends meet. The latter need to buy a cheap, but quality pair of shoes as well underwear, socks, face cloths and bath towels. These are necessities that Dollarama doesn’t sell and are tricky to buy online without first touching or wearing first.
TJX reported a Q1 beat in its top and bottom lines with earnings coming it at 44 cents per share vs. the expected 31 cents. Meanwhile, earnings and revenues rose year-over-year. True, many shops were closed in Q1 2020 from the pandemic, but open-only comp store sales jumped 16% YOY, including 9% for Canadian locations. With even more stores opening worldwide in Q2 and quarters to come, these numbers will only climb.
Analysts on both sides of the border call TJX a strong buy at nine buy signals and one hold with an average price target of $80.50 or 27% upside. Also, a month ago, TJX reinstated its share buyback program.
Reopening retail stocks have slid lately, so this a buying opportunity. TJX hit $73.78 on May 7 and now trades below $65. One caveat, though, is that TJX’s PE now stands at 52.7x, higher than the sector’s 32.5x. Attribute their PE to high growth expectations, but analysts foresee a forward PE of 22.94x. To be prudent, buy an initial position on a pullback, then see how TJX performs before buying a second tranche.
(Past pick from Feb. 2, 2021, up 29%)
Competing for the longest sidewalk lines is this celebrated Canadian chain of women’s boutiques. Aritzia is driven by a robust social media presence, rising e-commerce sales and loyal consumers. On February 2 before the Canadian openings and just as American states were reopening, I recommended buying this on dips. Since then, ATZ-T has soared almost 29%.
Most of this action has happened in the past month after the company closed its secondary offering of subordinate voting shares and just last week bought Reigning Champ, a leader in premium athletic wear. It’s a canny expansion into men’s clothing that the street likes. Shares jumped 2.5% the morning after this announcement. The Scotiabank analyst expects Reigning Champ to add to Aritzia $25 million in revenue and $5 million in adjusted EBITDA this calendar year.
If so, the deal will extend Aritzia’s stellar performance, which handily beat the street in its last four quarters. Its EPS of 16 cents outpaces the sector’s 13 cents, while its profit margin of 2.24% outshines its peers of 1.88%. The PE stands at 220.5x, which appears sky-high until you consider the sector’s 211.2x. That said, the street foresees a forward PE of only 36.48x.
While reopening stocks have been challenged this month, Aritzia is trending the other way: up. The problem is, it’s jumped so much lately that you need to wait for even a modest pullback before adding shares or entering. ATZ enjoys seven buys and a $38.14 price target or only 8.3% upside. Aritzia is a solid retail stock in a notoriously tough business and is run by sharp minds. This is a winner.
If you want to buy a basket of reliable American consumer discretionary stocks, there’s XLY trading on the Nasdaq. While I prefer picking individual stocks, XLY is intriguing because its two largest holdings are actually tech names: Amazon and Tesla which together comprise 36% of this ETF. Amazon will remain the king of e-retailing, while Tesla is volatile but leads the EV sector. So, you get some growth in this ETF.
Other major retail stock holdings in XLY are the Home Depot and Lowe‘s (home improvement has soared during Covid), McDonald‘s, Starbucks and Nike (strong global brands) and TJX. XLY’s MER is only 0.12%, though it pays a modest 0.67% dividend yield. Currently trading around $173, XLY is $7 off its recent highs. With summer spending expected to remain robust, XLY will likely return to those highs, but it’s probably worth waiting for at least a 5% pullback before entering, as market volatility driven by uncertain interest rates will likely endure in coming weeks.