Why Investors Should Avoid Retail Stocks

The retail industry is in shambles and with news that Toys ‘R’ Us is next on the list to close up shop, it just further reinforces the inability of traditional brick-and-mortar stores to be able to keep up with giants like Amazon.com, Inc. (NASDAQ:AMZN) and Walmart Inc (NYSE:WMT), both of which have a significant presence online.

Even the companies that are still in business have plenty of their own problems. Loblaw Companies Ltd (TSX:L) sounded the alarm when it announced that industry-wide price fixing had effectively overcharged customers for bread for more than a decade and as a result many of its competitors are now in legal jeopardy.

And if that wasn’t enough, minimum wage hikes are adding more costs to an industry that simply can’t afford any more. It’s hard to find positives in the industry and with many headwinds working against some big-name retailers, there’s not a lot of potential left.

Despite all of these concerns we haven’t seen a significant sell-off in retail that may have otherwise been expected. However, there have been some small losses this year as Loblaw is down 3% while Dollarama Inc (TSX:DOL) has declined 1% after having a terrific 2017. Canadian Tire Corporation Limited (TSX:CTC.A) has actually seen its share price rise more than 5% in 2018 after a strong quarter gave the stock a big boost.

Over the long term, there are serious risks among retail stocks that simply shouldn’t be ignored. While Dollarama and its low-cost model might be best equipped to handle more adverse conditions in the industry, it too is not immune. Investors would be better off investing in other industries where prospects for growth are much stronger.