Why there are problems ahead for retail stocks

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Retail stocks made a comeback in August. It may not last.

Richard Levine/Alamy

Investors breathed a sigh of relief after the recent retail earnings season when reports weren’t as bad as feared. Maybe they should hold their breath again.

Of

walmart

(WMT) to

best buy

(ABY) and

Difference

(GPS), many retailer stocks got a boost from their quarterly reports in August. The market was quick to cheer for companies that were able to deliver better-than-expected results despite selling products ranging from apparel to consumer electronics that quickly fell out of favor with buyers.

Yet one thing these companies all have in common is that they broke through a bar that they themselves had lowered a few weeks earlier. Additionally, many retailers are still struggling with the high inventories that caused so much damage in the first place, with profits being dragged down by higher supply chain and transportation costs, as well as steep discounts. to move a glut of goods.

That’s not a good position at a time when high inflation is wiping out wage gains and eating away at Americans’ savings, while banks are starting to raise their lending standards and consumer confidence is lacking. For retailers, that could make this earnings season a quarter-long respite.

“Overall, we see a demand-led recession later this year or early next year,” says Chris Senyek, chief investment strategist at Wolfe Research. “Consumers are running out of steam.”

You wouldn’t know that by looking at retail stocks. In August, the


SPDR S&P Retail ETF

(XRT) was only down 0.3%, outperforming the


SPDR Consumer Discretionary ETFs

(XLY), down 4.5%, the


Consumer Staples Select Sector SPDR ETF

(XLP), down 1.9%, and the


S&P 500,

which fell 4.2%.

This outperformance came after sentiment turned sharply bearish at the start of the earnings season. In other words, for investors expecting the worst, not great, it was fine.

Take Best Buy, which rose on its second-quarter earnings, which reported earnings of $1.54 a share, beating expectations by 27 cents, even as sales at stores open for at least 13 months fell. more than 12%: “The best thing that can be said about Best Buy’s results is that they weren’t worse than expected, which for retailers was quite good this summer. .[but even] In an environment of low expectations, Best Buy’s second quarter results and second half guidance were mixed,” said Michael Baker, analyst at DA Davidson. And it’s a bull.

Best Buy isn’t alone either. Walmart is trading above where it was at the end of July, before announcing that profits would be 10% lower for the full year. Although it has outperformed in other times of economic distress, it is trading around 21 times forward earnings, meaning investors are willing to pay more for it now than before it cut its outlook. , even if the image of consumers is darkening.

Still, it may say more about Walmart’s defensive characteristics and relative safety at a time when things seem to be stacking up against the sector. Or the fact that during his earnings call he said he canceled billions of dollars in orders to control his inventory.

Indeed, that may be the key metric, says Senyek, who notes that retailers are likely to have over-ordered not just for the quarter that ended, but possibly through the end of the year. . “Stocks don’t lie,” he says. “We could see a double whammy during the holiday season [as consumer] demand is slowing.

His own research points to a number of discretionary businesses that have seen their exceptional inventory days increase significantly quarter-over-quarter and year-over-year, and that spans the revenue spectrum. , with

Columbia Sportswear

(COLME),

VF
Company

(VFC),

Kohls

(KSS),

Outdoor bridge workers

(PLATFORM),

Capri Holdings

(CPRI), Carter’s (CRI), Ralph Lauren (RL),

Ollie’s Bargain Outlet

(OLLI),

Hanesbrands

(HBI) and Five Below (FIVE) complete the top 10.

Interactive Platoon

(PTON) came in 12th, unsurprisingly to anyone following the former darling which tumbled after its fiscal fourth quarter results last week. It was the only retailer to see its inventory days jump more than 100 from the year-ago quarter.

Yet there was one company on screen that stood out, the only one with triple-digit increases both quarter-over-quarter and year-over-year, and that wasn’t a retailer.

Universal display

(OLED) inventory days increased by 113 and 158 respectively.

This is partly because display companies historically held more inventory than many others. But it also speaks to the fact that the slowdown in consumer demand isn’t just for T-shirts left on the rack at Gap, but also for Universal Display’s end markets, from tablets to TVs. This also showed in semiconductor results, as the sector gave retail a run for its money in terms of pessimistic forecasts.

“It’s not much different at a high level from what happens in retail,” Senyek notes.

The summer lease is too short and for retail inventory, the August reprieve may wear off with the season.

Write to Teresa Rivas at [email protected]

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