Walmart Canada & Canadian Tire: 2 Retail Stocks Investors Are Eyeing in 2020

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Summary

• Canada’s retail sector has been battered by the pandemic as consumers maintain social distancing and avoid physical stores.
• As a result, several retail brands have announced closures or filed for bankruptcy protection, leading to a massive drop in the value of retail stocks.
• The clear winners in retail segments in pandemic times are ecommerce players and consumer goods
• We look at the stock performance of Walmart Canada and Canadian Tire – two retailers that have made a lasting impression in the Canadian retail landscape.
• Despite the ecommerce and consumer goods gains, economists are anticipating a gloom future as consumers curtail spending and retail businesses struggle to navigate the next stage of pandemic.

Battered by the pandemic, Canada’s retail sector has been one of the worst-hit industries. A flock of retailers and mighty brands, including the likes of Le Tote, Army & Navy, Aldo, Ascena Retail Group Inc and many others, have announced closures or filed for bankruptcy protection. Most of these retailers rely on sales from brick-and-mortar stores that has suffered as the pandemic stretches on and people maintain social distancing. Drubbing of Canadian retail stocks has been widespread, with the exception of consumer goods and ecommerce segments. Stocks prices of ecommerce giants like Amazon and Shopify have hit the roof and analysts feel their soaring flight has not yet ended. Consumer defensive and cyclical companies such as Walmart and Canadian Tire are the other retail stocks that have hit the ball out of the park, churning generous returns amid pandemic.

Most economies look towards retail industry to gauge the consumer mood and spending. The numbers in Canada so far haven’t been too encouraging. After a two-month recovery, Canadian inflation was back to near zero for the month of July, signaling market stagnation. Economists are now anticipating a fresh round of gloom as consumers curtail spending with ceasing federal monthly aid and more retailers reporting losses in the coming months. Retail businesses, the backbone of economy, are struggling to navigate the pandemic market. The future is also unclear for service-based retail segments such as salons, restaurants and apparel stores.

The clear retail winners in these difficult times of pandemic are the ecommerce players and consumer goods. E-commerce sales have accelerated as people shift online for buying needs. While consumer goods, like utilities, retained their critical and essential goods tag. We look at two retailers that have had a lasting impression in the Canadian landscape and are expected to deliver stellar stock performance: Walmart Canada and Canadian Tire.

Walmart Canada (WMT: US)

US retail giant Walmart’s spectacular second-quarter earnings have hushed critics. Total revenue rose by 5.6 per cent year-over-year (YoY) to US$ 137.7 billion in the company’s Q2 FY21. Operating income grew from 8.6 per cent YoY to US$ 6.1 billion. The largest company in the world by revenue also reported strong sales figures, with e-commerce ruling the roost.

(Source: Walmart)

Walmart stocks have yielded over 10 per cent returns year-to-date (YTD). The scrips advanced by 5 per cent in a quarter. The company announced US$ 0.54 quarterly dividends. Its current dividend yield stands at 1.65 per cent while earnings per share is C$ 6.27 and price-to-earnings (P/E) ratio is 21. Its return on equity is 24.57 per cent and return on assets is 7.58 per cent.

Expansion in Canadian markets is ripe for the C$ 372-billion retail behemoth. The company announced US$ 3.5 billion investment in the country, most of which will be directed to enhance digital and in-store experience for shoppers over the next five years. These funds are in addition to previous US$ 1 billion investment in Canada for remodeling and launching new stores.

The retailer is building 550,000-square foot distribution center in Vaughan, 300,000-square foot distribution center in Surrey and will renovate an existing center in Cornwall. Other plans include upgrading 150 stores, which make up one-third of its store network in Canada, over three years.

Read: Walmart Canada Invests $3.5 Billion To Digitize Shopping, Launch New & Upgraded Stores

Canadian Tire (TSX:CTC)

Stocks of Canadian Tire have yielded nearly 22 per cent returns this year in the pandemic market. On the quarterly scale, the company’s stocks have advanced by 5 per cent.

The C$ 736-million-retailer distributed C$ 1.1375 quarterly dividends and has a current EPS of C$ 11.26 along with P/E ratio of 81.40. Its return on equity is 4.18 per cent and return on assets is 0.83 per cent.

Canadian Tire has a 2.12 per cent current dividend yield. The dividend yields stand at 22.67 per cent over a three-year period and 18.25 per cent in five years.

In its second quarter 2020 results, Canadian Tire’s revenue declined by 5.9 per cent YoY to stand at C$ 19.4 million. But net income dropped by a massive 96 per cent YoY to C$ 6.9 million in the Q2 2020.

Read: Three Food & Beverages Stocks Attracting Investors' Attention In Consumer Space

The company’s retail sales in physical outlets took a massive hit amid COVID in Q2 2020, with retail segment revenues dropping by 15.2 per cent YoY. However, e-commerce sales surged by a whopping 400 per cent YoY, growing by over C$ 600 million in the second quarter of 2020.

Canadian Tire operates hardware, automotive and home goods retail stores and has gas stations across the country.

As the pandemic stretches on, e-commerce retail segments will likely continue their rally, generating hopes for the income-loving investors.