Canada Starting to Mimic U.S. Retail Trends

by: FP Trading Desk

If holiday shopping tracked the sales trends of September and October, Canadian retailers would probably have had a reasonably profitable holiday sales period. But recent evidence suggests that consumer became much more cautious in November and retailers reacted quickly by implementing early discounts, according to Keith Howlett at Desjardins Securities.

“It appears that Canadian sales trends are rapidly moving to resemble U.S. trends,” the analyst said in a research note. This reinforces his preference for consumer staples retailers that have relatively good earnings visibility and less inventory risk like Metro Inc., Loblaw Cos. Ltd., Shoppers Drug Mart Corp. (OTCPK:SHDMF) and The Jean Coutu Group Inc. (OTCPK:JCOUF), he added.

While U.S. holiday sales are expected to be the worst in more than 20 years, trends in Canada began to deteriorate significantly in November and promotions flourished in December, Mr. Howlett said. He noted that retailers who are typically very disciplined in terms of both the timing and depth of their promotions, are as active as others this year.

When Wal-Mart (NYSE:WMT) Canada came out with slightly negative same-store sales in November, it sent an alarm bell to Canadian investors, the analyst told clients, and he thinks it could mark the first comparable store sales decline in Wal-Mart Canada history.

“The holiday retail sales outlook is extremely poor in the U.S., with many retailers desperate to turn inventory into cash in order to survive through 2009,” Mr. Howlett said, adding that Canadian retailers are also in cash-generation and cash-preservation mode.

At the same time, he thinks Canadian retailers were prudently cautious when they ordered inventory for the fourth quarter period. But they still have excess inventory as a result of falling demand.