2 blue chip consumer stocks to buy

The brick-and-mortar consumer goods industry is under direct threat from online retailers like Amazon.com. The consumer goods trend towards ordering products online versus going to a shopping mall is known as the Amazon-effect. However, analyst Peter Sklar boasts about a couple of Canadian consumer stocks which he says can compete with online behemoths.

Retail doomsayers and their pronouncements of a customer exodus from stores to online rivals aside, BMO Capital Markets analyst Peter Sklar makes a strong case for two Canadian stalwarts of the industry.

Mr. Sklar, based in Toronto, specializes in retail and consumer companies. Although he concedes that both of his ‘best buy’ selections recently contended with somewhat spotty quarters, the analyst continues to predict that both Canadian Tire Corp. Ltd. (TSX—CTC.A) and Alimentation Couche-Tard Inc. (TSX—ATD.B) will “outperform” the competition as his top Canadian stocks to buy now. The two companies rank among BMO Capital Markets’ Canadian large-cap ‘best buys’ to boot.

According to the analyst, Canadian Tire finished this year’s third quarter short of his expectations in terms of earnings. However, Mr. Sklar says the results were “mixed” (in a good way) because of strong same-store sales growth, including year-over-year increases of 4.7 per cent at flagship Canadian Tire stores and 4.6 per cent at the Mark’s Work Wearhouse chain. Quarterly consolidated same-store sales rose 3.9 per cent compared to the same period in 2016.

The company reported that total retail sales increased by 5.1 per cent, or $179.5 million, comparing the third quarters of this year to last year’s. “Although there was a slow start to summer, the company stated that seasonal categories performed well as the company was able to use data analytics to manage promotions effectively for the category,” says the analyst.

Along with its results, Canadian Tire unveiled a dividend hike of $1, or 38 per cent, to $3.60 a share annually. Already a high-dividend Canadian stock, the company also committed to a $550-million share repurchasing program. President and CEO Stephen Wetmore held up the dividend hike and buyback plan as signs of management’s confidence in the company.

Looking ahead, Canadian Tire will soon expand home delivery, which it launched as a pilot project at 10 stores in Ottawa at the beginning of October. Already, 100,000 individual items are available; the company will add 20,000 to 25,000 SKUs (stock keeping units) in early 2018.
“Average basket size for home-delivery orders is significantly larger than in-store baskets, and online orders are delivered within two days,” says Mr. Sklar.

Management told investors that the company plans to roll out home delivery regionally and, eventually, nationally. Canadian Tire management has also raised its target dividend payout ratio to a range from 30 per cent to 40 per cent, up from 25 per cent to 30 per cent previously. Mr. Sklar says: “Overall, we continue to find Canadian Tire’s valuation compelling compared to other mainline Canadian retailing and consumer stocks, with the implied multiple for the retail business being at 5.4 times our one-year forward retail EBITDA estimate.”

As for the analyst’s second pick for a consumer stock to buy now, fuel retailer and convenience store operator Alimentation Couche-Tard’s fiscal 2018 second-quarter numbers (period ended Oct. 31, 2017) included its highest net earnings attributable to shareholders yet, at US$435.3 million.

The contribution from the company’s latest acquisition, CST Brands, propped up its latest figures. Even so, Mr. Sklar points out: “Tepid traffic trends remained a focus on the (second-quarter results conference) call.”

Management noted that several factors affected the company’s second quarter, among them hurricanes in the southeastern United States, and trouble at its Quebec distribution warehouse.

CST’s US fuel same-store sales fell five per cent by volume year-over-year due to the hurricanes and merchandise same-store sales dropped 1.2 per cent.

Regarding the warehouse, the analyst elaborates: “Management quantified the latter to be about one per cent of Canadian merchandise sales and attributed it to a bottleneck after integrating both the Esso sites and CST’s Canadian network over a short period of time.” Couche-Tard says the problems have been largely resolved.

“We believe this softness in convenience store traffic is transitory. For the US market in particular, we note that the macroeconomic indicators remain positive and we expect this should filter through to consumer spending.”

Mr. Sklar notes that CST’s same-store sales were weak before its takeover by Couche-Tard. The 1.2 per cent decline was already an improvement compared to earlier quarters, he says.

He expresses confidence in Couche-Tard’s ability to turn around CST’s same-store sales trends, adding that the former achieved that just after acquiring the Pantry by improving store layouts, merchandising tactics, and fuel marketing strategies.

The analyst stands by a target price of $182 per share for Canadian Tire and $72 a share for Couche-Tard.

BMO Capital Markets managing director Peter Sklar covers retail and consumer stocks. He received his Bachelor in Commerce from the University of Toronto and his MBA from The Wharton School in Pennsylvania.

This is an edited version of an article that was originally published for subscribers in the December 22, 2017, 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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