Profit growth for Canadian retailers faces significant headwinds in the year ahead, including the weak economic recovery, a softer Canadian dollar (C$) and the prospect of lower consumer spending, says a new report from Moody’s Investors Service Inc.
The New York-based credit-rating agency’s report forecasts that operating income growth for nine Canadian retailers will decline this year because of challenging economic conditions and weakness in the C$. In addition, high household debt, slowing wage growth and layoffs will dampen consumer spending.
The Moody’s report expects year-over-year earnings growth among Canada’s major retail chains — such as Loblaw Cos. Ltd., Sobeys Inc., Metro Inc., Dollarama Inc., Canadian Tire Corp. Ltd., Jean Coutu Group, Hudson’s Bay Co., Sears Canada Inc. and Rona Inc. — to drop to 5% this year from about 8% in 2014. Overall, the report forecasts that retail sales growth will range from 3%-3.5% in 2015 compared with 3.6% for 2014.
“Consumers have been more budget-conscious since the recession, and while household debt continues to rise, consumer credit’s share, which is what is available for purchases of goods and services, has been falling and does not bode well for retail sales,” says Peter Adu, an analyst with Moody’s.
On the upside, the continued growth of e-commerce, the retreat of Target Corp. from the Canadian market, lower fuel prices and the strength of “dollar stores” will help ease some of the pressure on earnings, the Moody’s report says. In fact, the report notes that according to eMarketer, e-commerce sales in Canada will represent 5.9% of overall retail sales in 2015, an increase of 16.8% over 2014.
Furthermore, the exit of Target from the brick-and-mortar retail landscape will ease operating pressure on Canadian retailers the report adds: “The weak Canadian dollar and Target’s exit will also slow the entry of new U.S. players to the market, which have steadily gained retail share in Canada.”
Although lower fuel prices will help improve retailers’ transportation and distribution costs, the Moody’s report predicts that consumers will either save their gains from lower energy prices or use them to repay debt rather than boosting spending. “Given Canada’s reliance on the oil industry, sustained low oil prices will lead to more layoffs, which could further dampen consumer confidence and spending.”