* Grocers have done well, despite food price deflation
* Some discretionary stocks seen cheap with room to grow
* Outlook mixed for staples like Shoppers Drug Mart
* Analysts upbeat about Canadian retail sector
By Solarina Ho
TORONTO, Aug 8 Canadians have to eat in good
times and bad, but they don't have to buy a new snowblower.
That's simple logic behind the rally in consumer staples
during Bay Street's turbulent second quarter when economists
started to fret about a double-dip recession.
Conversely, as investors flocked to the safety of the
staples, some discretionary retailers languished. That makes
them relative bargains, analysts say, especially with consumers
now in the mood to spend.
Canadian Tire Corp (CTCa.TO) is a good example. The
retailer, which sells auto supplies, housewares and
nonessentials like snowblowers, has turned in decent results
and has a reasonably bright earnings outlook, but it got no
love from investors this year. The stock has barely budged, and
it's now inexpensive compared with the staples.
By contrast, Loblaw Cos Ltd (L.TO), Canada's biggest
grocer, has risen about 30 percent this year, while Empire Co
(EMPa.TO), the owner of Sobeys supermarket chain, has jumped 20
percent. The grocers took off even though the companies were
wrestling with food deflation, which typically leads to
price-cutting and lower profit margins.
"I do think we're starting to move into a period where
discretionary-type names will begin to take a little bit of
flight," said analyst Robert Cavallo of Mackie Research
Capital, who sees more value in discretionary stocks going into
the third quarter.
"I think there's some pretty good value in a name like
Canadian Tire as an example, relative to some staples which may
have gotten to pretty lofty valuations," said Cavallo, adding
that consumer staples have "really had a good run".
Leon's Furniture (LNF.TO) is one retailer that appeals to
Paul Gardner, a portfolio manager at Avenue Investment
Leon's has no debt, cash on the balance sheet and increased
dividends, Gardner said. The stock is up over 10 percent this
year, but still trading about 14 times earnings, according to
StarMine data. For Leon's, this is "not overly cheap, but it
has room to grow. The Canadian economy is in pretty good
shape," he said.
"Certainly in May and June -- when it looked like the
chatter about double dip (recession) was gaining steam --
people were looking for safety," said Barry Schwartz,
vice-president and portfolio manager at Baskin Financial
"The (grocery) sector has performed pretty well, and it's a
pretty good investment considering the volatility of the market
over the last year or two," said Avenue Investment's Gardner.
Sector Comparison: link.reuters.com/meh73n
"KICKED TO THE CURB"
For a staple stock like Shoppers Drug Mart SC.TO, which
has been hit with uncertainty due to new provincial
drug-pricing laws, there is debate over its valuation.
"We've always avoided (it), just because in a sense it's a
black box. You could never figure out the company," said
Gardner. "We think it's still too expensive."
Schwartz disagrees. For investors who are looking to invest
long term and are not motivated by quarter-to-quarter growth,
he sees value in a company like Shoppers, Canada's largest
"Shoppers Drug Mart's been kicked to the curb so many times
in the past few months, but the earnings are going to be there
and the valuation's never been cheaper," said Schwartz, who
still sees value in staples retailers.
There are still defensive overtones in the market, and
according to a report last month by the Conference Board of
Canada, consumers could even scale back spending in coming
months as interest rates rise and the economic recovery slows.
Schwartz also says some discretionary stocks, like
Lululemon Athletica LLL.TO -- which specializes in pricey
yoga wear -- and Dollarama (DOL.TO) -- a cut-price "dollar"
store -- are much too expensive.
"Dollarama to me is, the valuation is way too expensive.
... The same-store (sales) growth seems to be phenomenal, but
you're paying a pretty penny for that growth," he said,
explaining that high growth always encourages competition.
The apparel industry is a "fickle business", said Schwartz,
with clothing stores and sporting goods retailers such as
Forzani Group FGL.TO considered slightly more risky.
There is one discretionary stock analysts seem to agree has
an upside: Tim Hortons THI.TO.
While shares of the iconic Canadian coffee shop chain
haven't exactly languished -- they've climbed about 10 percent
this year -- six out of 13 analysts maintain a "buy" or a
"strong buy" on the stock while the remaining seven have a
"hold" rating, according to Thomson Reuters I/B/E/S.
It seems that a cup of Tim's coffee is the one luxury no
Canadian can live without.
"People are nervous about the economy. If it stumbles,
these are good places to hide of course. People can't live
without their Tim Hortons coffee," Schwartz says.
(Editing by Frank McGurty)