Retail Stocks: Contrasting Messages and Investing Opportunities

The recent performance of retail stocks has been quite remarkable. The SPDR S&P Retail exchange-traded fund has surged more than 8% over the past month, which is roughly double the rise of the S&P 500. Similarly, the Consumer Discretionary Select Sector SPDR Fund has climbed nearly 8%. While these big moves are impressive, the underlying message about the consumer is somewhat conflicting.

On one hand, Americans’ continuous spending has been pivotal in keeping the economy on track for a soft landing. However, there are indications that people’s financial situations may not be as prosperous as they seem. This can be observed through the increasing credit card debt and loan delinquencies.

Despite these extremes, Simeon Siegel, an analyst at BMO Capital Markets, believes that neither scenario is likely accurate. In fact, he sees this contrast as an opportunity for investors.

The recent surge in retail stocks can be attributed to the degree of pain experienced by this sector (and the broader market) in October. However, this knee-jerk reaction doesn’t fully reflect the true state of the retail industry.

Siegel highlights some interesting observations — Coach experienced year-over-year sales growth in the most recent quarter, while Michael Kors saw a decline. Similarly, Lululemon reported higher sales while Gap’s Athleta brand faced a decline. Walmart’s sales moved higher, whereas Target’s fell.

Drawing from these examples, Siegel concludes that it is difficult to attribute the problems in the industry to a specific customer subset. If direct competitors are experiencing opposing results, then it suggests that winners are winning and losers are losing.

To distinguish between the former and latter, Siegel ranked the retailers in his coverage based on fundamental changes such as revenue, gross margin, earnings before interest and taxes (EBIT) dollars, net debt, and consensus estimates. Additionally, he considered share price performance since September.

In summary, the recent surge in retail stocks presents a unique opportunity for investors. By carefully analyzing the fundamental changes and share price performance, astute investors can identify the winners among the losers in this volatile sector.


Stocks with Upside Potential

Potential Pullback Candidates

On the other hand, Under Armour, Ulta Beauty, Victoria’s Secret, and Ralph Lauren may face some headwinds despite recent market strength. While their stock prices have seen significant growth, their fundamentals suggest a possible pullback in the near future.

A Call for Caution

Aligning Stories and Results

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