Let's Go To The Store: Three Canadian Retailers Investors Can Count On

Couche-Tard, Dollarama And Canadian Tire Still Attract Customers As Department Stores Suffer

It came as no surprise that brick-and-mortar department stores reported dismal sales this Christmas season as every year, more shoppers stay home and place their gift orders online. The trend is gloomy for department store shareholders, but a welcome one for shareholders of online retail giant Amazon.com (AMZN/NASDAQ) and investors who own stock in couriers such as FedEx Corp. (FDX/NYSE), and United Parcel Service Inc.(UPS/NYSE).

But not every brick-and-mortar retailer is suffering. Here is a quick look at three large, established Canadian retail store chains whose growing sales and profits have demonstrated resilience in the face of increased online shopping. Their shares are suitable for most investors, depending on their investing style. Disclosure: neither I nor anyone in my family own shares in any of the three.

Alimentation Couche-Tard (ADT.B/TSX)

No matter what they order online, motorists still have to refuel their cars at gas stations and those looking for bread, milk, cigarettes, lottery tickets and other consumables are unlikely to order them via their computers. This means gas bar and convenience store operator Alimentation Couche-Tard is nicely insulated from the trend that’s hurting department stores.

Couche-Tard has a network of more than 12,000 owned and leased sites operating across Canada, the U.S., Scandinavia, Ireland, Poland, the Baltics and Russia and 13 other countries under names such as Circle K, Couche-Tard, Mac's, Kangaroo Express, Statoil, Ingo, Topaz and Re.Store. Many of its locations combine a convenience store with a fast-food restaurant, while others are simply unmanned automated fuel stations.

Founder Alain Bouchard founded the company with a single convenience store in Laval, Que. in 1980, then began expanding through acquisitions to 34 stores by 1986, 115 by 1987, 304 by 1995 and 1,625 by 2000. Further acquisitions brought it to today’s total, but unlike many companies that borrow heavily and pay hefty prices to swallow smaller rivals, Couche-Tard’s managers have shrewdly walked away from expensive or questionable deals.

In fiscal 2016, Couche-Tard announced its eighth straight year of record earnings, reporting net earnings of US$1.194-billion, up 28.4% over fiscal 2015. Excluding non-recurring items, net earnings were $1.188-billion, up 16.7% over the previous year. The company’s return on equity (ROE) reached an impressive 27% in fiscal 2016.

Couche-Tard shares have had a huge run-up over the past five years, climbing 500% to more than $60 from the $10 level they traded at in early 2012. An investor who put $1,000 into Couche-Tard when the shares were less than $1 in September of 1999 and reinvested the dividends would now have more than $88,000, for an average annual compound return of 29%, figures from longrundata.com show.

At a recent share price of about $60, the stock trades at a high 23 times earnings and 5.1 times book value per share, but the sales per share ratio is just 0.78%. Couche-Tard has regularly increased its dividend, most recently to 36 cents per share (9 cents per quarter), yet the dividend still yields just 0.6%.

Despite its impressive long-term growth record, the 0.6% dividend yield makes the shares unsuitable for income seekers, and the fact it’s share price has been essentially flat for the past year and a half means it is suitable only for patient investors seeking long-term growth.

Dollarama Inc. (DOL/TSX)

Just as Couche-Tard’s consumables are unlikely to be bought online, the inexpensive items on Dollarama’s store shelves are not something consumers think of ordering from Amazon. Dollarama has 1,069 corporate-owned stores where shoppers go for low-priced kitchen utensils, plastic cutlery and plates, placemats, stationery, school and craft supplies, cleaning products, shampoo, soap, balloons, gift wrap, toys, storage bins baskets and other items priced below $4.

Like Couche-Tard, Dollarama has risen from humble beginnings and is now under the control of the fourth generation of Rossys. In 1910, Salim Rossy emigrated to Montreal from Lebanon and opened department store S. Rossy Ltd. Salim’s son George took over in 1937 and led the retailer until his death in 1973, when his son Larry took over what was then a chain of 20 stores. Larry opened the first Dollarama in Matane, Que. in 1992 and began converting other locations to discount retailers. Last May, Larry, 73, became executive chairman and handed over day-to-day operations to his son Neil, 46, who himself has been involved in the company for 25 years.

In fiscal 2016, Dollarama’s net earnings rose to $385.1-million or $3.00 per common share on sales of $2.650-billion, up from $295.4-million ($2.21) on sales of $2.331-billion for fiscal 2015. Return on equity is an impressive 63.8%. Dollarama regularly buys back its shares from shareholders, which enhances per-share earnings.

In its most recent management discussion and analysis (MD&A), Dollarama explains that it gets most of its products from about 30 low-cost foreign suppliers, largely China.

The company warns that bad weather, particularly just before major holidays such as Valentine’s Day, St. Patrick’s Day, Easter, Halloween and Christmas could hurt both its distribution network and store traffic.

Dollarama went public in October 2009 and except for a minor hiccup in the winter of 2015-16, it has been steady growth ever since, as the shares are up 909% since their first listing. A shareholder who put $1,000 into Dollarama when it went public and reinvested the dividends would have more than $10,500 today, representing an annual compound growth rate of 38.5%, figures from longrundata.com show.

Dollarama Inc. has been a superb investment, but the company’s shares are expensive, trading at about $100. At that price, the stock trades at more than 28 times earnings, nearly 26 times book value per share and 4.33 times sales per share. The 40c per year dividend yields just 0.4%, which means investors who buy Dollarama at this price are betting on continued growth. Dollarama is suitable only for momentum investors -- those who buy high in hopes of selling higher.

Canadian Tire Corp. (CTC.A/TSX)

Canadian Tire, like Tim Horton’s, has become a national icon. In 1922, brothers John and Alfred Billes pooled their $1,800 in savings to buy Hamilton Tire & Garage Ltd. at the corner of Gerard and Hamilton streets in Toronto. The next year they sold the business and opened a new store and Yonge and Gould streets under the name Canadian Tire Corp. “because it sounded big,” Alfred later admitted. They issued their first catalogue in 1928, opened their first associate store in 1934 and opened their first gas bar in 1958 at Yonge and Church streets in Toronto, where the company began issuing discount coupons later known as Canadian Tire “money.”

In 2001 the company launched its e-commerce site and has since shifted its focus from adding new stores to improving its digital operations, although most Canadians don’t mind going to a Canadian Tire store for such items as winter tires, hockey sticks, toboggans or garden sheds. The company’s website boasts that more than 90% of Canadians live within 15 minutes of a Canadian Tire store and more than 80% shop at a Canadian Tire every year.

Today Canadian Tire has a network of more than 1,700 retail and gasoline outlets. Along with its namesake chain that sells hardware, tools, garden products, housewares, automotive and sporting goods, the Canadian Tire retail family includes PartSource and Gas+, together with Mark’s Work Wearhouse, which sells casual, outdoor and industrial clothing, and sportswear stores Sport Chek, Hockey Experts, Sports Experts, National Sports, Intersport, Pro Hockey Life and Atmosphere.

Canadian Tire’s 2015 annual report showed net income of $735.9-million ($8.61 per share) on revenue of $13.76-billion for the full year. Sales were up 3.2% at Canadian Tire stores and up 4.4% at its sporting goods retailers, but slipped 0.5% at Mark’s Work Wearhouse.

In the third quarter of its 2016 fiscal year, Canadian Tire reported improved results, as revenue (excluding gasoline) was up $48.1-million or 1.8% over the same quarter of 2015. Earnings per share was $2.44, down 6.7% from the third quarter of 2015, which had included a gain from the sale of surplus property. When that sale is factored out, earnings actually increased by 6.6%, the company said.

At a recent price of about $138, Canadian Tire shares are up about 250% since 1999. At $138, Canadian Tire shares trade at 15.7 times earnings, twice book value per share and just 0.8 times sales per share. Return on equity is a reasonable but not sensational 13.4%. Over the past seven years, Canadian Tire has steadily increased its quarterly dividend to the point where the annual dividend of $2.60 per share yields 1.88%.

Between these three retailers, Canadian Tire shares have the lowest price/earnings ratio, the lowest ratio of price/book value per share and a price/sales per share ratio just slightly higher than Alimentation Couche-Tard’s.

In summary, buy Alimentation Couche-Tard if you’re a patient investor seeking long-term growth, buy Dollarama if you’re a more active trader willing to buy high in hopes of selling higher, and if you’re a long-term, conservative investor seeking slow growth at a reasonable price, buy Canadian Tire.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca