Momentum Continues for Retail Sector Stocks and IPOs

By Megan Harman

Retail industry stocks in Canada have outperformed the broader stock market in recent years, and the sector continues to show bright prospects. For retail companies, that backdrop presents an attractive environment to consider a public offering, according to Ryan Thomas, head of business development, diversified industries at TMX Group Ltd., which owns the Toronto Stock Exchange (TSX).

In the past year, the consumer discretionary index on the TSX increased by 20%, compared to a 6% increase for the broader TSX composite index, according to Thomas. The consumer discretionary index includes retail companies such as Dollarama Inc., Sleep Country Canada Holdings Inc. and Canadian Tire Corp., along with companies involved in other consumer-oriented activities such as entertainment, leisure and communications.

Over the past five years, the consumer discretionary index posted returns of approximately 122%, whereas the broader stock market index increased by roughly 30%.

“If you look at the returns for the consumer indexes, they really show a significant outperformance over the TSX over not only the last year, but over a five-year period,” Thomas says.

The gains in consumer stocks have been driven by strong performance of companies in the sector. “There have been some real homeruns in the space,” Thomas says.

Dollarama, for instance, has seen its stock surge by more than 400% over the past five years, thanks to consistently solid growth in sales and profits. As another example, luxury apparel maker Canada Goose Holdings Inc.’s stock price has more than doubled since its initial public offering (IPO) in March 2017. Other publicly traded retailers have also reported healthy growth in same-store sales recently, which have bolstered their share prices.

Although negative news surrounding struggling retailers such as Sears Canada and the disruption being caused by the rise of e-commerce has dominated media attention recently, Thomas says that has overshadowed the positive performance of many retail companies.

“If you look at the overall headlines in the consumer space,” he says, “I think it hides the fact that there are some really strong Canadian brands that are executing.”

With positive economic conditions contributing to growth in consumer spending across Canada, the upward trend in retail sector stocks appears likely to continue. “Overall, we’re seeing a strong economic background, which would support continued growth of these companies,” Thomas says.

The positive economic and market environment has motivated numerous retailers to pursue IPOs in the past few years. In fact, the consumer sector in Canada has seen 11 IPOs since 2015 – more than any other sector on the TSX, according to Thomas.

“We’re seeing a lot of momentum,” he says.

Examples of recent consumer sector IPOs include toymaker Spin Master Corp. and mattress retailer Sleep Country, both in July 2015, fashion retailer Aritzia Inc. in October 2016, restaurant chain Freshii Inc. in January 2017, Canada Goose in March 2017, and clothing retailer Roots Corp. in October 2017.

The primary advantage of an IPO is access to a vast new source of capital. That can provide companies such as retailers with the funds they need to pursue growth. Going public also provides a boost in profile, which can be beneficial for consumer brands.

“Certainly, a lot of retail brands would take advantage of the increased visibility and prestige of being a public company,” Thomas says.

However, becoming a publicly traded company also comes with challenges and significant new responsibilities. Managing quarterly reporting requirements and investor communications, for example, requires considerable resources. Nonetheless, Thomas says an IPO can be worthwhile for many companies.

“The potential positive outcomes of accessing public capital and having a public currency for executing on your business probably far outweigh the extra layer of complexity that you have to bring on to be a public company,” he says.

Going public also comes with market volatility and the possibility that the stock price will not perform as expected. In the case of Roots, for instance, the stock tumbled by 20% in the first day of trading. However, Thomas notes that the stock has since rebounded as the company has reported positive sales growth.

“There’s always going to be short-term volatility in the marketplace,” he says. “Most management teams that go public are taking a long-term view of the opportunity. People shouldn’t be concerned about short-term stock movements.”

The prospect of going public is not only for major household names. Smaller companies in the earlier stages of growth that are looking for access to capital can pursue an IPO on the TSX Venture Exchange, Thomas notes.

For example, Canadian grocer Organic Garage Ltd. listed shares on the Venture Exchange last year, and children’s clothing company Peakaboo Beans Inc. listed shares in 2016.

“Not only do we have a platform for the Canada Gooses and Roots of the world, but we also have a platform that smaller companies can explore raising capital and growing their business on,” Thomas says. “We have a very advanced and stable ecosystem for supporting early stage growth companies.”