The Canadian consumer sector is set to make gains in 2017, according to a new industry forecast from Desjardins Securities, as retailers’ earnings benefit from improved GDP growth and a strengthening employment outlook.
Canadian retailers are also in a favourable position because the threat of new international competitors entering the market is far lower than it was a few years ago, due in no small part to lessons that foreign retailers learned from the Target Canada debacle.
“The spectacular failure of Target in Canada and the collapse of oil prices are, in our view, the two primary reasons for this change in perception about Canadian retailing,” said Wednesday’s report, authored by Desjardins retail analyst Keith Howlett.
“A few new retailers continue to enter Canada, such as Nordstrom, Saks and Uniqlo, but generally in a tightly controlled and measured manner.”
While two key consumer indices have posted solid year-to-date returns, with the S&P/TSX Capped Consumer Staples Index up 9.2 per cent and the S&P/TSX Capped Consumer Discretionary Index up 12.7 per cent, both have underperformed the 20.6 per cent return of the S&P/TSX Composite Index. Desjardins Economics forecasts a return to economic growth in Alberta in 2017, with real GDP growth matching the national forecast of 1.9 per cent.
The firm says other important drivers for the consumer sector in 2017 are the strengthening prices for benchmark commodities such as oil, cotton and dairy, and the market share losses of embattled Canadian retailers, most notably Sears Canada and Sobeys’ owner, Empire Co.
Sears Canada more than doubled its net loss in the third quarter, while its sales slid 21 per cent. The struggling retailer has seen its shares lose three-quarters of their value in the last year.
Desjardins notes that Sears continues to sell its owned real estate in order to raise the level of cash required to absorb its ongoing operating losses and negative cash flow while it implements merchandising and digital upgrades, but the firm is “not optimistic” that the retailer’s turnaround plan will gain traction.
The beneficiaries of Sears’ ongoing erosion in appliances and other hard goods include Home Depot, Lowe’s, Canadian Tire, Sleep Country, Ikea, Leon’s, Brault Martineau and Home Hardware, Desjardins says. Similarly, Sears’ losses in apparel and accessories are likely going to Winners, Reitmans, Mark’s, Hudson’s Bay, Shoppers Drug Mart, Sephora, Walmart and Real Canadian Superstore.
Empire, on the other hand, remains the second-largest grocery chain in Canada, but its current run rate of operating earnings from food operations for the first half of fiscal 2017 is below that of its run rate before it acquired Safeway Canada. Since buying the Western Canadian retailer in 2013, Sobeys has been plagued by a host of systems, supply chain and merchandising mishaps that have alienated former Safeway customers. The retailer also lacks a discount banner outside of Ontario, which puts it at a disadvantage against rival grocers.
“In our view, Empire must strategically reassess and redesign its go-to-market strategy, improve operational execution in western Canada and reduce unnecessary costs,” the report said, adding Desjardins estimates the retail operator “has two to four years of heavy lifting ahead of it.” That could include a further downsizing of the Sobeys store network in selected regions of the country.
In its most recent quarter, Empire’s adjusted profits spiralled 70 per cent and its sales fell 2.1 per cent; at Loblaw and Metro, profits were solid and sales were up 1.4 per cent and 3.4 per cent, respectively.
The two grocers will likely benefit from Sobeys’ ongoing market share losses for at least two to three more quarters, Desjardins said.
The investment firm rates Metro as a buy with a 12-month target price of $46, from its current price of $40.25, and Loblaw as a buy with a 12-month target price of $82, from its trading price of $70.44 on Wednesday.
Source: The Financial Post