By now, provinces and states across North America are deep into reopening. The long lines to enter shops and to pick-up items ordered online tell the story. It’s the perfect time to write about the top retail stocks to buy during the reopening.
Retail stocks out of hibernation
Retail stocks, though, are still limited by social distancing with stores capping the maximum number of shoppers at all times, and there remains the possibility of a second wave close their doors again.
Some areas are open than others, but retail has finally unlocked its doors and after a long and painful hibernation.
We dig into the top retail stocks to buy as (of this writing) restaurants and bars are in the earliest stages of reopening, so forecasting their fates is premature.
What are customers looking for?
Judging by downtown Toronto, there is pent-up consumer demand for hardware, leisure products (such as bicycles), barbecues and clothes. Keeping these caveats in mind, here’s a look at three retail stocks that show promise.
Top Retail Stocks #1: Aritzia (ATZ-T)
Before the pandemic, this Vancouver-based fashion retailer topped many investors’ buy lists, and now it continues to stand out because of its strong social media following.
Approaching one million Instagram followers, Aritzia shoppers (fans, really) constantly post selfies to show off their latest #Aritzia purchase. Their clothes are affordable and attract a wide audience. There are 96 Aritizia stores, three-quarters being in Canada with the rest in the States.
To compare, the Gap boasts three million Instagram followers and operates 3,500 stores worldwide. Relatively speaking, Aritzia‘s social media presence overshadows its more-established peer—and the results are paying off.
Last week, the Vancouver-based company released its Q4 ending March 1, 2020, on the eve of the lockdown. Net revenue rose 6.3% and comparable sales grew 8.9%; full year increases came in at 12.2% and 7.6%, respectively. However, the report also stressed that after the lockdown, the chain drove its e-commerce operation hard, which resulted in online revenue growth of 150% YOY. About 30 stores will reopen by May 31 and pent-up demand is encouraged by summery weather.
In fact, the company is warning investors of a 45% drop in Q1 revenue ending May 31. To fight this decline, management is pouring more resources online by testing a new Clientele App to connect with its top customers and to track their purchases and profiles, shares styles and drive traffic to its online business.
In other words, Aritzia is doing all the right things a fashion retailer should in this difficult, unpredictable environment. It helps that Aritizia‘s customers are passionate and loyal, so the company’s online sales should continue to rise.
Compared to the TSX, Aritzia stock in the last three months was -21% vs. the index’s -6.7%, but in May, Aritizia outperformed the exchange 9.5% vs. 2.5%. More store reopenings should accelerate business. Aritzia is good for the long-term.
On Monday, Aritizia popped nearly 4%. It pays no dividend and trades at 22.5x.
Top Retail Stocks #2: Canadian Tire (CTC-T)
It puzzled me that this Canadian icon was not deemed essential during the lockdown, though Dollarama was, given the wide overlap in goods offered. No doubt, the closures will hit the Tire’s Q1 and Q2.
Also, the debt they carry concerns analysts such as Jason del Vicario. However, since the chain reopened, consumers are flocking back.
In the second half of May, the stock jumped from $94 to $117. Empirical evidence explains why. In the first days of reopening, one downtown Toronto location saw huge lines for pick-ups as well as in-stores stretch around the corner.
Timing helps. It’s spring and Canadians are gardening, upgrading their patios, repairing sheds, painting and buying BBQs, bicycles and camping equipment.
Canadian Tire supplies all these products. Further, with almost nobody taking vacations, Canadians will staycation, explore the outdoors and lounge in their yards.
True, the Tire’s online shopping operation still woefully lags its competitors, such as Walmart.
That said, even analysts who are lukewarm on the name deem its 3.84% dividend safe in a time when many divvies have been suspended. The stock trades at a 10.5x PE. Not a screaming buy, but CTC is definitely one to consider and counts among the safer bets.
Top Retail Stocks #3 : Ross Stores (ROST-Q)
At no other time does the retailing maxim location, location, location matter more than now. Ross Stores is an American discount retailer that buys excess inventory from big department stores like Nordstrom (think Winners).
Ross is largely found in strip malls. Given social distance, strip malls encourage shopping distinctively more than enclosed shopping malls. (Witness the trickle of customers inside Toronto’s Eaton Centre so far.)
Ross also benefits because many of its stores are located near Target locations. An essential retailer which is often packed on the weekends, Target is going out of its way to be safe, sanitary places for customers, and these efforts are paying off in sales.
Goldman Sachs notes that retailers like Ross which are located near essential stores like Target, will “benefit from a faster recovery of sales.” Ross enjoys high margins and low debt. Since May 14, Ross stock has climbed from $81 to $97 (currently trading at a 21x PE). That’s a 20% move already, but there’s likely a little more room left to climb as reopenings continue and the sun shines.
Ross pays no dividend.
What are the Top 3 Retail Stocks to buy during the reopening?
We have chosen Aritzia (ATZ-T), Canadian Tire (CTC-T) and Ross Stores (ROST-Q) as the Top 3 Retail Stocks to buy during the COVID-19 reopening.