Companies such as Loblaw Cos. Ltd. (L) and Maple Leaf Foods Inc. (MFI) that sell household staples are reaping the rewards as Canadian shoppers turn more frugal amid record consumer debt.
The Standard & Poor’s/TSX index of consumer staples stocks has surged 11 percent in six months through yesterday, touching an all-time high on March 28, compared with a 0.6 percent decline for the Toronto benchmark. Ten of 11 members in the index have posted positive returns over that period, led by a 31 percent gain by beverage-maker Cott Corp. (COT:US) and a 25 percent return by Maple Leaf, a Toronto-based manufacturer of meat products and baked goods. Brampton, Ontario-based Loblaw, the nation’s biggest grocer, has returned 22 percent.
“The beauty about the consumer-staples group is what you’re really buying are companies that sell what people need, as opposed to what they want,” David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates in Toronto said in a telephone interview on April 4. “You can tap into the consumer without really having to make a directional bet on the shape of the economy.”
The world’s 11th-largest economy is expanding at the slowest pace since emerging from recession in 2009, in part because the country’s indebted consumers are scaling back purchases of discretionary items and becoming more price conscious.
The ratio of Canadian household debt to disposable income rose to a record 165 percent at the end of last year while 54,500 people lost their jobs in March, the biggest decline since the recession in 2009, Statistics Canada reported on April 5.
Companies such as Laval, Quebec-based convenience-store operator Alimentation Couche Tard Inc. (ATD/B), and Loblaw are attractive because they have solid management teams with track records of generating cash and returning funds to shareholders, said Brandon Snow, a portfolio manager with Cambridge Advisors, a division of CI Investments Inc.
“If you’re talking about an equity fund that can hopefully generate high single-digit or low double-digit compound returns over time, these names need to be in there,” said Snow, lead manager of the C$2.1 billion ($2.1 billion) Cambridge Canadian Equity Corporate Class mutual fund. CI Investments is the second-largest shareholder of Couche Tard and the fifth-largest Loblaw shareholder, according to data compiled by Bloomberg.
Including dividends, Couche Tard has returned 63 percent over the last year, while Loblaw has gained 26 percent, compared with a total return for the S&P/TSX index of 5.2 percent. Couche Tard was little changed at C$55.12 at 9:41 a.m. in Toronto while Loblaw slipped 0.5 percent to C$41.33.
Non-durable goods consumption, which include items such as food, was one of the fastest growing sector of the economy in the last nine months of 2012, growing at an average quarterly rate of about 2.9 percent over that period. That compares with 0.3 percent for the economy as a whole and about 0.5 percent for household consumption expenditures.
The economy’s performance in the second half of last year was the weakest since the 2009 recession. It will grow 1.7 percent in 2013, according to the average estimate of 28 economists surveyed by Bloomberg. That would be the weakest since a 2.8 percent contraction in 2009.
Consumer confidence is declining too. The Nanos Economic Mood Index -- an aggregate of survey responses on the outlook for the economy, job security, personal finances and real estate -- fell to 99 in February, the lowest since 2009.
As the economy has slowed, investors have shifted their money from energy and raw materials producers into more “defensive” stocks, said Derek Dley, an analyst at Canaccord Genuity Corp. The S&P/TSX materials index has dropped 22 percent over the last six months, while the energy index has fallen 2.6 percent.
Loblaw stock has 10 buys, four holds and no sells, according to analyst ratings compiled by Bloomberg, while the average 12-month price target rose to C$43.50 as of yesterday from C$37.46 on Dec. 12. The price target on Barrick Gold Corp (ABX), the world’s largest producer of the metal, has declined to C$43 from C$48.67 over the same period. Shares of the Toronto-based firm have 15 buys, 12 holds and one sell, according to Bloomberg data.
“These value-play retailers will continue to do well in the face of a relatively cautious consumer,” Dley said by phone from Vancouver on March 28. “The luxury guys tend to hold up pretty well. It’s everyone in the middle that gets squeezed.”
U.S. consumer staples’ stocks are also benefiting from this time-tested defensive strategy with the S&P 500 Consumer Staples index of 42 stocks advancing 18 percent in the past year, compared with a 12 percent gain for the parent S&P 500.
To be sure, Canadian retailers are increasingly facing competition from U.S. chains. Target Corp. (TGT:US), the second-largest U.S. food distributor, began operating in Canada this year and plans to open 125 to 135 stores in 2013. The company last month announced the opening of 21 stores in Ontario, the country’s most-populous province.
Shelley Broader, chief executive officer of the Canadian unit of Wal-Mart Stores Inc. (WMT:US), the world’s largest retailer, said in a Jan. 22 interview that her chain plans to expand its fresh- food offerings to every store in Canada, from about 50 percent now. The Bentonville, Arkansas-based retailer has said it will spend C$450 million to build new stores and renovate others, adding at least 37 superstores in the next year to its 379 locations in Canada.
“In Canadian retail, where are you going to find a good growth story?” Vivian Lo, who helps manage C$6.7 billion at Aston Hill Financial Inc. (AHF) said in an April 3 interview in Bloomberg’s Toronto office “You don’t have many of those.”
While Aston Hill owns Couche Tard and Montreal-based grocer Metro Inc. (MRU) among Canadian retailers, the firm has been looking outside the country for consumer stocks, she said.
Still, the experience Canadian retailers have gained competing with companies such as Wal-Mart have helped them keep their costs down, said Jennifer Bartashus, an analyst with Bloomberg Industries. Loblaw said Feb. 28 that it kept its average quarterly internal food prices “flat” in the fourth quarter of 2012, even though national food inflation averaged 1.5 percent.
“They have been very focused on delivering to the value- oriented consumer, which has become a prevalent mindset in Canada,” Bartashus said in an interview. “They’ve made their investment early on, anticipating and knowing this would be a continuing trend. You are seeing some reward for that foresight.”
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