As a general rule, we should always ensure that our portfolios are well diversified so that as a whole, our money can be well-protected and provide acceptable returns through all market and economic cycles.
Of course, retail stocks are part of the diversification effort and as such, they have a part to play within a portfolio.
I’ve been writing about the risks to retail stocks in past articles, as elevated debt levels naturally means that weaker consumer spending had to eventually come.
Especially spending on non-essential products.
Retail stocks tumbling Retail stocks are increasingly struggling in this new world of weaker consumer spending and a general slowing sales environment.
We can see this today, with Canada Goose Holdings Inc (TSX:GOOS)(NYSE:GOOS) plummeting more than 21% as the company reported weaker-than-expected sales and a weaker-than-expected outlook.
Canada Goose’s product offering is narrow, premium-priced, and as such, this company is naturally vulnerable to a consumer spending slowdown. Plus, it has been priced for perfection for a long time now.
Another company reporting a weaker sales and consumer spending environment is Indigo Books and Music Inc. (TSX:IDG). While lesser known than Canada Goose stock, Indigo stock is also plummeting today, and is down almost 12% at the time of writing.
Selling non-essential products, it is natural that this Indigo would also see slowing sales in this difficult environment. Total revenue in the latest quarter decreased 3%, and same-store sales decreased 1.1%.
The difficult retail environment that’s hitting retailers is much more difficult on those who provide non-essential products, premium-priced products.
In contrast, Dollarama Inc (TSX:DOL) sells a variety of essential products, a diversified set of products that range from essential to non-essential, all at low prices, which shelters this Dollarama stock from excessive downside and makes it a better pick at the right price.
Dollarama is trading at increasingly attractive historical valuations, and also has a dividend to pay investors to be patient.
Dollarama is flat today, but has already gotten killed back in 2018 and is down 23% from its 2018 highs.
Final thoughts At this time, I would continue to avoid most retail stocks in general, with a focus on the defensive retailers for some exposure, as high debt levels and a weak consumer certainly do not bode well for these stocks.
Metro Inc (TSX:MRU), a high-quality retailer with a strong history of dividend increases and shareholder value creation would be a good defensive stock to add for portfolio diversification. The grocery and pharmacy businesses are pretty much immune to the ups and downs of the economy and consumer spending.
Fool contributor Karen Thomas owns shares of INDIGO BOOKS & MUSIC INC.
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