TD Notes Consumer Discretionary
We are adding a position in Aritzia Inc. (ATZ-T) at 3.0%.
Over the past year, we have taken a more defensive positioning within the consumer sectors by maintaining a relative portfolio overweight in staples and an underweight in discretionary. It was our view that an aggressive Fed would lead to an economic slowdown and reduced consumer spending, which would favour the more defensive staples over discretionary sector. However, with expectations of a less aggressive Fed and a resilient labour market, we have witnessed a pickup in consumer discretionary and in its relative strength versus the staples sector (Exhibit 1). A similar rotation has also occurred among the Canadian small caps, with the discretionary sector also leading staples though the market rally year-to-date (Exhibit 2).
As a result, we are raising our consumer discretionary portfolio weighting closer to a market weight (6.2% versus the S&P/TSX Small Cap Index at 7.1%) with the addition of Aritzia. As we show in Exhibit 3, both 2023 and 2024 earnings estimates (year-end February) have predominately been revised higher over the past year. Although analysts widely lowered their estimates following Aritzia's Q3/F23 earnings beat last month, the overall decline to consensus earnings was mild (-4.5% to both 2023 and 2024 consensus EPS). Subsequently, the upward trend in earnings remains. However, since its January 11 earnings release, Aritzia's share price has sold-off considerably, shedding 16.8% ($42.64 versus $51.22), including a 10.0% drop last week. This has led Aritzia into near oversold technical levels (RSI: 30.5), but it may be nearing technical price support (Exhibit 4). With forward earnings only 2.0% below their peak and seven consecutive quarters of year-over-year revenue growth to all-time highs (Exhibit 5), we believe that the recent decline in share price is overdone. Aritzia is presently trading at a forward P/E (NTM) of 19.8x, which is considerably below its post-COVID median P/E of 27.7x (Exhibit 6). Within the Consumer Discretionary sector, we also continue to hold our position in Pet Valu Holdings Ltd. (PET-T, portfolio weight 3.2%), which is the top-ranked consumer discretionary name within our quantitative earnings model (Exhibit 7).