Canadians’ spending intentions are improving sequentially and showing signs of life, according to a new survey by Stifel, an investment banking company.
Recently, the company published its quarterly survey assessing spending intentions for Canadians over the coming 12 months.
“Surprisingly, spending intentions are up sequentially in most of the categories we track and near a one-year-high. Categories such as mattresses, powersports, dollar stores, the pet industry, apparel and toys are all at or near a one-year-high,” said the report.
“While our survey suggests improvement in Canadian consumer confidence, spending intentions are still in a pattern of contraction with 52 per cent of respondents being likely or very likely to reduce their discretionary spending over the next 12 months. Despite that, these results piqued our curiosity and suggest investors should start to think about how to position their portfolio under a scenario where Canadian consumer confidence returns to an expansionary mode. Our survey results are positive for Sleep Country, Dollarama, Aritzia, Gildan, Pet Valu, KITS, BRP, and Spin Master.
“In our view, the results paint an accurate picture of the state of the Canadian consumer and historically the results have been generally a good indication of upcoming financial performance of our companies under coverage.”
Martin Landry, Managing Director, Equity Research for Stifel Canada, said the company was surprised by the increase in spending intentions that the survey suggests.
“We’ve been carrying this survey for three years now. We’re doing it on a quarterly basis . . . Historically it’s been somewhat a good predictor of operational performance of our companies. So the recent results were quite upbeat,” he said.
“We saw a nice increase in spending intentions on discretionary items.”
Here’s Stifel’s take on the report:
- Discretionary spending intentions rebound in July. After nine months of depressed spending intentions, the outlook appears to improve. According to our survey results, 48 per cent of respondents expect their spending on discretionary items to increase in the coming 12 months, up 400bps sequentially from April 2024. Interestingly, 14 per cent of respondents indicated they were “very likely” to increase their discretionary spending over the next 12 months, the highest proportion of the last five surveys we conducted. However, our survey would suggest we are still in a pattern of contraction as 52 per cent of respondents are likely to reduce their spending on discretionary items;
- Stronger spending intentions for clothing and apparel vs. July 2023. 54 per cent of respondents to our survey expect to increase their spending on clothing and apparel in the next 12 months. While spending intentions for clothing and apparel appear stable sequentially, when compared to our July 2023 survey results, they came-in 400bps higher, which is surprising given the current economic slowdown. After nine months of spending intentions below 50 per cent, this is the second survey suggesting we are in an expansionary period for clothing and apparel. We view these demand trends as positive for Aritzia and Gildan;
- Signs of demand recovery within the mattress industry continues. The demand environment for mattresses in Canada has been challenging for the past two-plus years. However, our survey results suggest that the outlook is improving with spending intentions up for two consecutive quarters, and with July 2024 showing the strongest spending intentions since March 2022. Hence, we could see a scenario for a rapid pickup in demand as the economic environment improves;
- Demand trends for powersports vehicles appear resilient in Canada. Our survey results show that spending intentions for powersports vehicles appear to have rebounded sequentially and have reached their highest level since July 2022. These results align with BRP’s comments that demand weakness has been more pronounced in Asia Pacific, Europe and to some extent in the U.S., while Canada has been a bright spot. However, Canada represents roughly 15 per cent of BRP’s revenues. Hence, the impact on BRP’s overall results remains limited vs. the U.S. where BRP generates ~60 per cent of its revenues. We have seen no change in the demand environment in the U.S. as suggested by CDK Global data, which shows that recent demand trends at U.S. dealerships remain soft;
- Demand intentions for the pet industry reach the highest level in a year. Following an unexpected drop in demand intentions within the pet industry in April 2024, demand trends appear to have improved sequentially with July 2024 spending intentions coming in at the highest level of the last 12 months. Compared to July 2023, demand intentions are flat, which we view as positive for Pet Valu. These trends paint a more bullish outlook for the pet industry than expected and may indicate that demand trends are better than feared;
- Demand for “value” alternatives within eyewear products appear strong. On June 19th, KITS announced the official launch of its private label daily silicone hydrogel contact lenses. According to our analysis, KITS contact lenses are priced at a discount of roughly 40 per cent to national brands. According to our survey results, this should appeal to consumers as 74 per cent of respondents who buy contact lenses would consider switching to a private label brand if the price was at least 30% cheaper. While KITS’ private label contact lens business is small, we see a potential for the company to grow this segment, which should boost profitability given margins on KITS’ private label products tend to be much higher vs. margins on national brands products;
- Spending intentions for the toy industry remain in positive territory. 54 per cent of respondents to our survey expect their spending on toys to increase in the next 12 months. This is a decline of 200bps sequentially from our April 2024 survey. However, 15 per cent of respondents said they are “very likely” to increase their spending on toys in the coming 12 months, the highest level in the last year. Overall, spending intentions within the toy industry have shown limited volatility over the past four surveys and have remained positive (i.e. a majority of respondents expect their spending to increase), which is a positive for Spin Master.
Landry said the results could be the start of the return of consumer confidence of Canadians which may seem a little bit counter intuitive to what we’ve been hearing lately.
“I could explain this by two things,” he added. “There’s been some healthy salary and wage increases over the last two years. Sometimes even higher than inflation and we’ve also got our first interest rate cut by the Bank of Canada. Although that’s not going to have a meaningful impact on mortgage payments yet, it’s the start of a trend towards interest rate reduction and maybe that plays out in consumer confidence and maybe that’s why we’re seeing that reflected in our survey.”
