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The Unloved Retail Sector Is Quietly Attempting a Rebound

Posted by Yijy8kNUMO on March 4, 2018

After one of their toughest years ever, beleaguered U.S. retailers are enjoying a pickup in quarterly sales, helping to boost the shares of many brick-and-mortar operators even as the stock market stumbles this year.

The moves mark a partial respite for retailers, which have reckoned with sliding sales, record store closures and bankruptcy filings as consumers have increasingly shifted to shopping online. The bleak outlook led many investors to sour on the sector last year, sending shares of several department stores, including Macy’s Inc.,J.C. PenneyCo. and Sears Holdings Corp., down by double-digit percentages, while the S&P 500 knocked out a 19% gain.

But in recent weeks, a string of retailers has posted stronger-than-expected earnings, driven by a pop in holiday sales and further rounds of cost-cutting. That has helped spur a rally in shares of companies running everything including department stores, electronics chains and bargain outlets. The S&P 500 department stores subindustry index has climbed 19% this year, while an S&P 500 index tracking the performance of electronics retailers has risen 6.7% and the broad S&P 500 has gained 0.7%.

“Right now we’re seeing the perfect scenario for retailers: high consumer confidence, relatively low expectations [around their performance] and stronger-than-expected consumer spending. When you put all these things together you have the retail earnings season in a nutshell,” said Victor Jones, director of trading at TD Ameritrade.

To many, the retail sector’s early gains are the latest indication that the consumer is on strong footing—something that bodes well for the broader economy. Investors and analysts closely monitor measures including employment, household wealth and consumer confidence, as consumer spending accounts for about two-thirds of the U.S.’s total economic output.

Recent data have mostly been encouraging, showing U.S. consumer confidence rising in February to its highest level since 2000, even after the stock market tumbled. Retail sales slipped in January, but some economists say the figures could pick up, especially with many workers starting to take home larger paychecks following the U.S. tax overhaul.

While the broader stock market has managed to rise for years even as many retailers lagged behind, investors and analysts say a pickup in shares of brick-and-mortar operators would be an encouraging sign that the economy is continuing to grow.

“It’s good to see the consumer discretionary sector moving up, especially after it not being a leader for so long,” said Lori Calvasina,head of U.S. equity strategy at RBC Capital Markets, adding that consumers are looking fairly strong.

Macy’s is among the beaten-down stocks that are seeing a bounce. Shares jumped 3.5% Tuesday, bucking the S&P 500’s 1.3% decline for the day, after the retailer posted stronger sales over the holiday quarter and said it had signed a deal to sell part of its Chicago store. The stock is now up 21% for the year.

“We know consumers are out there, and it’s up to us to win with them,” Macy’s Chief Executive Jeff Gennette said on the company’s earnings call.

Discount apparel retailer TJX Cos. also tore higher, with its shares rising 7% to a fresh 52-week high on Wednesday after strong holiday sales helped it beat analysts’ estimates for fourth-quarter same-store sales. For the year, it is up 9.4%.

Dillard’s Inc., the Little Rock, Ark.-based department store, surged 17% Tuesday after it reported earnings and revenue that topped analysts’ expectations, while shares of Best Buy Co. jumped 4% Thursday, even as the S&P 500 fell 1.3%, after the electronics retailer reported same-store sales surging in the holiday quarter as demand for video games rose.

But not all retailers have shared in the recent gains. Within the S&P 500 consumer discretionary sector, which includes dozens of retailers, as well as e-commerce giant Inc. and online streaming service Netflix Inc., nearly half the stocks are posting losses for the year.

Among the biggest laggards: Victoria’s Secret parent L Brands Inc., whose shares have slid 28% this year as the company has struggled to reverse a decline in sales. The firm reported better-than-expected revenue for the fourth quarter Wednesday afternoon, but lowered its forecast for first-quarter profits, sending shares sliding.

Newell Brands Inc., the maker of food containers, Mr. Coffee machines and Elmer’s glue, has fallen 14% in 2018 after having to lower earnings forecasts several times last year.

Despite a flurry of strong results, the S&P 500 consumer discretionary sector is expected to post slower earnings growth than many of its counterparts. With nearly all results in for the latest quarter, earnings for the sector are expected to rise 9.1% from the year-earlier period, according to FactSet, below the 15% projected for the broader S&P 500. For the following quarter, earnings are expected to grow 6.6%, versus 17% for the S&P 500, according to FactSet.

The disparate gains in the sector have led some to caution that, once again, it pays to be picky within the retail space.

“Even though there’s underlying strength in the data supporting the overall sector, you still have to be careful here,” said TD Ameritrade’s Mr. Jones.

Author: Akane Otani
Source: Wall Street Journal, March 2018
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