Sector outlook: Retail

Sectors in-the-know investors will definitely want to keep an eye on

Canadian consumers have been resilient in their ability to shop till they drop, and 2006 was no exception. However, industry watchers say that while growth in retail sales for 2006 is expected to come in at a healthy 6.3% when the final figures are in, the pace of spending is decelerating, a trend likely to continue in 2007. And some parts of the country will feel the pinch more than others.

Ed Strapagiel, executive vice-president of Kubas Consultants in Toronto, says he expects a 4.9% gain in total retail sales for 2007, to $410.9 billion. That's down from the 6%-plus growth levels of the previous two years. Strapagiel expects lower GDP growth, mostly in the first half of 2007, will be the major cause. The slide won't be as severe as in the U.S., where Strapagiel predicts sales will climb by a modest 3.8%, compared with 7% in 2005 and 6.1% in 2006. However, Ontario and Quebec, which account for more than half of Canadian retail sales, can expect slower growth, with gains of somewhere between 3% and 4%. Alberta, with 15% of the nation's sales, continues to be the hottest retail market, but without “Ralph Bucks”–the $400 doled out to every resident because of provincial surpluses–in 2007, Strapagiel says it is unlikely to keep up its “nose-bleed pace” of 2006, when sales grew by 16.5%. Still, Alberta's expected sales growth rate will, at 10.7%, be double the national average.

There will also be changes in what sectors have momentum and which are flagging. Store-based retail sales will grow at a respectable 5.7%, down slightly from 6.3% in 2006. However, Strapagiel says overall sales growth in the automotive sector, including gas stations, will dive to 3.3% from 6.4%, thanks to lower fuel prices. He predicts gas-station sales will drop 0.9% in 2007, down from 15.3% growth in 2005 and 8.9% in 2006. The picture for new car sales is a bit brighter: they should grow more than 4%, up from the 3.5% increase in 2006. A cooler housing market will affect related retail sectors, but Strapagiel predicts sales should remain robust: home centres and hardware stores are expected to grow by 9.4% in 2007, compared with 13.1% for 2006, and in-store sales of furniture and home furnishings will grow 7.8%, down from 10% in 2006.

As for retail earnings, the Conference Board of Canada says in its retail trade industry outlook, published in the fall of 2006, that profits, and margins, will decline in the near term, thanks to stiffer competition. (Just think of the impact that Wal-Mart's new Canadian supercentres, selling both food and general merchandise, will have on the market.) The board predicts profits will drop to $8.6 billion in 2007, from $8.9 billion in 2006, before rising again in 2008. By 2010, it expects profits will cross the $10-billion barrier.

The bottom line is that while there might be some short-term pain on the horizon, retailers can rely on consumers to keep their cash registers humming.