Which retail stock to buy, and which one to hold

Follow what major financial analysts have to say about these well-known North American retailers.

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Canada Goose Holdings Inc. (TSX—GOOS)

Canada Goose has navigated the pandemic well, retaining product and price discipline while investing for future growth in its international and e-commerce businesses. The channel shift to direct-to-consumer (DTC) remains an earnings tailwind.

The company’s fiscal first-quarter 2023 results were modestly ahead of CIBC World Markets analysts Mark Petrie’s and Kunaal Gidwani’s expectations, though in the lowest-revenue period of the year (approximately five per cent of revenue).

The analysts say, “While we remain bullish about many aspects of GOOS’s growth potential, the lack of visibility on demand and China recovery keep us on the sidelines. Our estimates are updated, but little changed. Our price target edges down to $36 (was $37) and our rating stays at “neutral.”

“We are encouraged by the strength and performance of its non-parka categories, which we believe highlights underlying brand momentum ahead of its peak selling season, and continued (but slow) progress towards becoming a year-round lifestyle brand. Though lockdowns negatively impacted sales, the U.S. and Europe continue to be bright spots, with ample white space opportunity.

“Wholesale orders have typically been a key indicator of customer demand ahead of the fall/winter season, and trends remain favourable, with no order cancellations thus far. However, there is still a lot of uncertainty about how the macro environment evolves between now and peak season.

“Management’s fiscal 2023 EPS guidance of $1.60 to $1.90, reflects this uncertainty with the low end assuming limited, periodic COVID-19 disruptions in Mainland China during peak season, and the top end reflecting more normalized conditions.

“If demand continues to hold, the risk to reward is attractive, as we believe upside, even to the top end of management’s guidance is possible. However, given the lack of visibility to macro and seasonal factors, particularly in China, we remain on the sidelines and will monitor closely for supportive and encouraging signals.

“China trends have lagged peers, and visibility is limited. The balance sheet remains healthy and leaves room for continued return of capital to shareholders.”

Canada Goose is a Canadian designer, manufacturer, and distributor of outerwear, sold through the wholesale and direct-to-consumer channels.

Target Corp. (NYSE—TGT)

Target Corp.’s investors have seen the best of times, as shares of the retail giant soared in 2021, with gains in home furnishing boosting profit margins to new highs. However it appears that many have abandoned the stock as growth slowed and excess inventory caused the company to take a financial hit.

Goldman Sachs analyst Kate McShane does however reiterate her Buy rating, given the continued strength in the top line, supported by industry-leading traffic trends and unit share gains in all categories.

The analyst also gave the stock a $205 target share price. Ms. McShane also believes that profitability should improve throughout the second half of the year, given that the improved inventory position will result in fewer markdowns. Target’s long-term growth drivers remain intact, including likely wallet-share gains across categories from various retailers, along with a higher margin profile versus pre-pandemic levels, given its scale, efficiency gains, and continued investments.

The analyst highlights that, “The company indicated unit share gains in all categories, with year-over-year growth from those that are more replenish-driven. Additionally, Target retained traction in its digital sales (17.9 per cent of total sales versus 17 per cent a year ago) with growth driven by same-day services, namely drive-up, underscoring the relevance of the company’s store base within its omni-channel footprint.

Target reiterated its fiscal 2022 revenue growth target of around 3.5 per cent. Target is a major big box department store from the U.S.

This is an edited version of an article that was originally published for subscribers in the November 2022/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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