2 retail stocks to buy

“Bricks and mortar will still remain very, very important . . . consumers are very interested in getting back to the stores” says Scotiabank’s Patricia Baker.

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Is ‘going to the store’ old-fashioned? Scotiabank’s Patricia Baker says “bricks and mortar will still remain very, very important”.

With rising consumer spending high in mind everywhere, acquisitions are the order of the day in the world of retail, judging from Scotiabank analyst Patricia Baker’s favourite stocks.

Ms. Baker covers the sector as director, retailing, global equity research for Scotiabank from Montreal.

Speaking on Scotiabank’s Market Points podcast on June 17, she noted that compared to 17 retail bankruptcies in 2019, there were “well over 30” in 2020, including footwear chain Aldo and furniture and housewares seller Pier 1 Imports. At the same time, major brands such as Starbucks and Victoria’s Secret (a subsidiary of L Brands) severely cut locations. Even before the pandemic shuttered stores, brick-and-mortar retail struggled to keep customers in light of competition online. By and large, the survivors, such as Canadian Tire, have made it by speeding up their online retail strategies.

Ms. Baker says of companies forced to close stores during the pandemic: “The online (business) has been a lifesaver for them,” in many cases leading to actual 2020 results that bettered pre-pandemic projections at the start of last year.

She predicts that conveniences like curbside pickup, which have already proven popular among consumers and added to corporate revenue for relatively low costs, are here to stay. As governments lift COVID restrictions, however, consumers are eager to return to normal life, the analyst argues. “The bricks and mortar will still remain very, very important. Where we have seen reopening, consumers are very interested in getting back to the stores” and have turned into “omni-channel” shoppers, she says. Among the companies that Ms. Baker covers, she assigns a “sector outperform” to women’s clothing retailer Aritzia Inc. (TSX—ATZ) and healthcare stock Neighbourly Pharmacy Inc. (TSX—NBLY).

Neighbourly consolidating retail pharmacies

The analyst officially initiated coverage of the latter company on June 14. “Neighbourly, though only a young company, has established a solid track record of completing successful mergers and acquisitions and delivering solid revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) growth,” she says. At present, the company’s store network spans more than 130 locations across the country. It plans to grow its base by around 30 stores per year by acquiring independents, implying a network of at least 230 independent pharmacies by the end of fiscal 2025.

Ms. Baker says the Canadian retail pharmacy market is highly fragmented and ripe for further consolidation. She points out that about 6,500, or 60 per cent, of the 11,000 pharmacies in the country are independents. “Neighbourly has identified 3,600 independent pharmacies that fit its strict criteria as suitable acquisition targets.” The company’s acquisitive attitude is also apparent in its substantial investments in corporate infrastructure, which it estimates is capable of supporting up to 400 pharmacies at present.

Looking ahead, the analyst predicts several important trends will drive prescription counts higher. “These tailwinds include an aging population, a rising prevalence of chronic conditions, and the expanding scope of practice for pharmacists. The pharmacy market is also highly regulated, leaving the Canadian retail pharmacy market relatively impervious to the rise of disruptive models, such as mail order or online dispensing.”

Since as much as 70 per cent to 80 per cent of sales come from the prescription counter, Neighbourly has a very strong patient focus, says Ms. Baker. “Its patient focus means Neighbourly’s community pharmacies are highly involved in the communities they serve, thereby engendering a high level of patient loyalty.”

Aritzia acquires Reigning Champ

Aritzia is a similarly expansive company that announced the acquisition of Vancouver-based athletic wear designer and manufacturer Reigning Champ on June 15. Under the terms of the deal, Aritzia will receive a 75 per cent stake in Reigning Champ based on a total enterprise value of $63 million; the remainder, held by Reigning Champ’s management, will be converted to Aritzia shares in three instalments between 2024 and 2026.

Reigning Champ has four retail outlets, two each in Toronto and Vancouver, along with an online channel growing in US and international popularity. Ms. Baker says: “It also distributes its products through a wholesale channel selling to retailers including Nordstrom, Saks Fifth Avenue, Simons and Harry Rosen, which Aritzia sees as a powerful marketing tool for the brand.”

In particular, Reigning Champ provides Aritzia with an excellent opportunity to pursue growth in menswear without disrupting its existing brand positioning in womenswear. Although the brands will remain separate from a customer point of view, all back-end functions will be integrated, enabling Aritzia to leverage its existing supply chain, IT, analytics, and eventually even sourcing in support of Reigning Champ’s growth.

This is an edited version of an article that was originally published for subscribers in the July 2, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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