After a horrendous 2017, U.S. retail stocks have mostly bounced back in 2018. The SPDR S&P 500 Retail ETF is up 4.2 year-to-date (as of this writing), doubling the modest 2.1 percent gain of the overall S&P 500.
Though it hasn’t been all sunshine and roses for retail this year – Sears finally declared bankruptcy and J C Penney is trading under $1.50 per share as mall traffic continues to suffer— other stocks such as Target, Nordstrom, Macy’s, and Kohl’s are all outperforming heading into the critical holiday shopping season. What’s behind the turnaround?
The Q3 earnings season is not yet complete for retailers, but analysts polled by Refinitiv expect the sector to report overall same-store sales growth of 3.6 percent, up from just 1.7 percent a year ago. Discount stores are performing especially well, generating 4.0 percent same-store sales growth.
Not surprisingly, internet and catalog retail earnings are expected to grow the most in the quarter, up roughly 50 percent from last year. Walmart just reported 43 percent online sales growth in the quarter in its earnings report last week, and Amazon reported 29.3 percent revenue growth in the quarter.
According to Refinitiv, distributors (such as Costco) earnings are also growing at an impressive 27.9 percent clip, while personal products companies (such as Colgate-Palmolive) and hotels, restaurants, and leisure companies (such as Marriott) are still struggling, with 1.3 percent and 0.8 percent) companies are still struggling.
Of course, retail stock performance in the first three quarters of the year is meaningless if it can’t carry over to the massive holiday shopping season. Analysts at Cowen recently looked ahead to holiday shopping season and said investors can expect a good year from leading retail stocks.
Cowen is predicting retail sales growth of between 4-5 percent this holiday season thanks to several key drivers. First, the U.S. economy is booming, with unemployment at its lowest level in decades and wage growth finally starting to accelerate. In addition, consumer confidence is extremely high relative to its historical levels.
The calendar may also help this year. With Christmas falling on a Tuesday, there will be one additional shopping day between Thanksgiving and Christmas than there was last year.
While foot traffic will likely continue to decline this year thanks to the secular rise of online shopping, Cowen expects traffic decline to slow to just 1.8 percent between Thanksgiving and Christmas this year compared to a 4.8 percent decline last year.
Retail stocks may have bounced back in 2018, but Sears and J C Penney investors are well aware that stock selection remains critical. Here’s an overview of the numbers some of the top performers of the year have been putting up:
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Disclosure: the author holds no position in the stocks mentioned.
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