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.
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.
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Fool contributor Karen Thomas owns shares of INDIGO BOOKS & MUSIC INC.
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