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  • KPB & Co Research

The retail industry globally has been subject to technological disruptions particularly since the Amazon era. It is no secret that a sizeable amount of retail sales volume has moved from brick and mortar to digital stores, and the haemorrhage continues to this day. Beginning in early 2018, the retail industry in Canada had the added problem of a slowdown in momentum. As recession fears rose and trade tensions intensified, a more cautious consumer, and dimmer business outlook provided more friction for retail transactions.

Statistics Canada released information that suggest that retail sales grew 1% at the end of May 2019 when compared the the same period 12 months earlier. The 1% growth in sales is meagre when compared to the 18-year average of 4.2% and is continuation of the deceleration in momentum experienced since early 2018. A sector by sector breakdown in retail sales show that the more tepid growth came on the heels of a 5.4% sales decline in the "Electronics and appliance store", a 3.9% decline in the "Building material and garden equipment and supplies dealers", a 3.3% decline in "Convenience stores", and a 2.5% decline in "Clothing and clothing accessories stores". The decline in retail sales for the various sectors were offset somewhat by strong growth in "used car" sales (+11.5%) and sales seen at "Furniture and home furnishings stores " (+5.8%).

Canada: Retail Sales For May 2019

Over the last 18 years, retail sales has gone up consistently every year, except in 2008 when the global recession hit consumer demand, but has also shown intermittent periods of cyclicality. There was a marked slowdown in growth in October 2002, October 2011, March 2015, and in late 2017 to early 2018. Of all the slowdowns in the last 18 years, two coincide with an economic recession: that of 2002, and 2008. With continued tightening of monetary conditions, and more trade tensions we have seen a material slowdown in economic activity that has spilled over into the retail environment. Consequently, as the 2018 calendar year folded into 2019, the slowdown in retail sales growth deepened, and evidence of same began to show up in the earnings estimates and outlooks for stocks in the retail space.

Going forward, Canadian based investors should thread cautiously when looking to invest in both companies that are based online and those that are not, as the economic momentum could turn further negative quickly. Retailers in the Canadian market overall have been having a tough time, with bankruptcies occurring at a similar place in the USA. On the positive side, those retailers with recognizable brands and an international presence such as Lululemon, and Canada Goose have been doing reasonably well in-spite of the headwinds.

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