2 consumer goods stocks to buy; 1 to hold

Analysts look to consumer stocks Canadian Tire and Loblaw for growth and some income but Dollarama’s same-store sales miss prompts a more “neutral” recommendation.

Canadian Tire Corporation Limited (TSX—CTC.A)

Greg Hicks, president and chief executive officer of cyclical consumer goods stock Canadian Tire, attributed the company’s recent strong results to the company’s ‘omni-channel capabilities’ and a growing customer connection with its brand. With one-third of its stores impacted by closures, and many more subjected to restrictions, its e-commerce sales reached record levels during the second quarter, doubling the volume of orders in the first quarter.

Canadian Tire Corporation Ltd. is a group of companies that includes a retail segment, a financial services division and CT Real Estate Investment Trust. The retail segment is led by Canadian Tire and includes Mark’s, Pro Hockey Life and Sport Chek. For the six months ended July 3, 2021, Canadian Tire made $386.8 million (adjusted) attributable to shareholders, or $6.29 a share, compared with a loss of $23.2 million, or $0.38 a share, in the same period of 2020. The increase was led by strong growth in the retail segment and earnings growth in the financial services segment. Adjusted earnings at the retail segment increased by $478.6 million to $328.6 million, primarily driven by strong growth at Canadian Tire. Income before taxes at the financial services segment was $251.7 million, up 107.7 per cent, thanks mostly to a higher gross margin.

Canadian Tire’s earnings should rebound strongly this year as the economy continues to reopen. Pent-up consumer demand should work to the company’s advantage as more people return to in-store shopping. Meanwhile, demand for the company’s brands is on the upswing, driving strong product margins.

Canadian Tire is a buy for growth and some income.

Loblaw Companies Limited (TSX—L)

Loblaw’s performance continues to be affected by the pandemic. Grocery demand continued to benefit from elevated eat-at-home trends in the second quarter. Online pick-up and delivery options helped the company drive volume share gains. Meanwhile, the drug store division continued to see variability in its prescription business and reduced consumer demand for high-value items like cosmetics in its front-store business due to lockdowns.

Loblaw Companies Limited has two reportable segments. The retail segment consists primarily of corporate and franchise-owned retail food stores and associate-owned drug stores. The financial services segment provides credit card and banking services, the PC Optimum program, insurance brokerage services and telecommunications services.

For the 24 weeks ended June 19, 2021, Loblaw made $856 million (adjusted), or $2.48 a share, compared with $609 million, or $1.69 a share, in the similar period of 2020. The increase was primarily driven by the underlying performances of the retail and financial services segments. Adjusted gross profit at the retail segment rose 5.7 per cent to $7.3 billion, thanks to favourable changes in the sales mix in both food and drug retail, and underlying improvements in business initiatives. With the release of its latest financial results, Loblaw declared a 9.0-per-cent increase in its quarterly dividend, to $0.365 a share.

Loblaw anticipates that grocery sales will remain high due to the pandemic, including the impact of lockdown measures in many jurisdictions. As economies reopen, however, revenue growth may be challenged, assuming consumers return to pre-COVID consumption patterns. Costs, however, should improve as COVID-related expenses decrease and Loblaw’s process and efficiencies and data-driven insight programs continue to deliver benefits. Loblaw is a buy for growth and some income.

Dollarama Inc. (TSX—DOL)

Noisy second-quarter results and a same-store sales (SSS) miss for Dollarama Inc. surprised the market, though it was management’s cautious commentary on pricing—and specifically the potential timing of a $5 price point launch—that drove under-performance in the shares.

CIBC World Markets analysts Mark Petrie, John Zamparo and Kunaal Gidwani were likewise surprised, although they do see Dollarama management’s conservative style as the shrewd path and the most likely to support long-term success. Their estimates are moderated slightly and their recommendation remains at Neutral.

The analysts chalk up the SSS miss to noise from the Ontario selling restrictions as opposed to anything off-track with regards to Dollarama’s offering or value proposition. Notably, SSS were up 5.1 per cent in the 7.5 weeks after restrictions were lifted. Management commented that SSS growth is flattish for the third quarter-to-date, though the bulk of sales are still to come. Again the analysts were surprised by this trend and had previously forecast 3.5 per cent growth. Combined with a second quarter miss, this adds concern to the outlook for Dollarama’s SSS.

The analysts also say: “We expect price increases will continue to work their way through the system. Prior to the call, we had seen the introduction of the $5 price point in fiscal 2023 as increasingly likely. However, management shared a clear preference for managing current cost inflation through product strategies (adjusting cost through content and sizing) as opposed to price. While this is likely disappointing to some investors, we believe this is the prudent path for an industry leader with relatively blunt pricing tools that is already delivering world-class profitability.”

Dollarama is Canada’s largest dollar store chain, operating over 1,300 stores nationwide.

This is an edited version of an article that was originally published for subscribers in the November 2021, Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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