Competitive pressures will challenge earnings but create buying
TORONTO, March 26, 2014 /CNW/ - After a two-year "rocket ride" for
retail and consumer stocks, outsized returns will be hard to find in
2014 but there could be great opportunities for bargain-shopping
investors, according to CIBC World Markets Inc.
"The past two years have been a rocket ride for Retail and Consumer
stocks in Canada," says Perry Caicco, Equity Analyst at CIBC. "The TSX
Staples Index has risen 53 per cent, and the Discretionary Index has
risen 67 per cent, which is about three times faster than the overall
But the fuel for those increases, namely rampant M&A activity, real
estate spin-offs into REITs and investor focus on stable cash-producing
consumer names over resource stocks, has largely dissipated, writes Mr.
Caicco in a note published for CIBC's Retail and Consumer Conference
happening today in Toronto.
"2014 is shaping up to be a year of digestion and transition, as
companies absorb acquisitions, shift strategies and rebuild their bases
all while the competitive landscape remains on fire," says Mr. Caicco.
"As a result, we do not see foresee outsized returns in the Retail and
Consumer space this year, and have encouraged investors to focus on
either high-growth companies, or more traditional companies where
management is actively driving value."
He notes that earnings for many companies in the retail sector will be
challenged this year due to a weak Canadian dollar, debt-conscious
consumers, and square footage growth that has intensified competition
and squeezed margins. "As quarters unfold, and as the challenges become
apparent, multiples are likely to decline. But underneath it all,
certain transition activities will begin to bear fruit and there could
be some great bargains again among these stocks."
Mr. Caicco adds that he expects Walmart and Target "to be quite
aggressive in the hunt for sales this year, and everyone will have to
respond or see revenues erode. On top of that, we still have new retail
arrivals on the way, including Nordstrom and HBC's Saks operation, and
plenty more from TJX," which operates Winners, Marshalls and Homesense,
he adds. "And we haven't even mentioned the elephant in the room:
Mr. Caicco believes that e-commerce could more than triple its share of
Canadian retail sales, growing to 5 per cent by the end of the decade
from 1.5 per cent today.
Companies in significant transition, either due to asset integrations or
changes in market dynamics, include all grocers as well as Maple Leaf
Foods, HBC, Aimia, Tim Hortons, Bauer, Whistler Blackcomb Holdings and
Dorel. "Earnings results are likely to be unstable" in the period
ahead, says Mr. Caicco. He adds that "even the slightest stumble (or
modest disappointment) can send stocks down sharply. We have already
seen evidence of that behavior at Loblaw, Empire, Metro, Aimia, RONA
The complete note from Mr. Caicco is available at: http://files.newswire.ca/256/Cover_Note_March_26.pdf.
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SOURCE: CIBC World Markets
For further information:
Tom Wallis, Communications and Public Affairs at 416-980-4048, firstname.lastname@example.org