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Holidays not looking festive for retail stocks

Frugal shoppers cut into bottom lines

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NEW YORK: Wall Street is starting to doubt that retailers can snap out of a year-long stock-market slump, as consumers increasing­ly tighten their belts heading into the crucial holiday shopping season.

It’s been a brutal 2022 for retail stocks. And sales from the fourth quarter, traditiona­lly the strongest time of the year, may not be a saviour this time around as more stores and chains warn that frugal shoppers are going to cut into their bottom lines.

Some traders are clearly betting against the sector, or hedging their exposure to even deeper losses.

Trading volume in bearish put options for the consumer discretion­ary sector spiked recently, with the turnover now at levels similar to those during the March 2020 pandemic sell-off.

Similar scepticism was seen in May when a slew of retailers cut their annual profit forecasts.

A cautious approach is understand­able. Target Corp tumbled after announcing that sales trends softened in October, calling out weakness in key gift areas like toys.

The National Retail Federation also predicted that holiday sales would grow at a significan­tly slower pace than last year.

And Amazon.com Inc projected the slowest holiday-quarter growth in its history, sending its market value briefly below US$1 trillion (RM4.57 trillion).

The bad news reflects how much inflation, growing economic uncertaint­y and rising interest rates are weighing on holiday spending plans.

“The consumer is going to be looking for deals, and that will end up likely pressuring margins,” said Mark Stoeckle, chief executive officer of Adams Funds.

“So if you believe that, why would you own these stocks right now?”

During the third quarter, the firm’s Adams Diversifie­d Equity Fund, which has about Us$2bil (Rm9.1bil) in assets under management, sold its stakes in Target and Walmart Inc in favour of more defensive consumer stocks, like beverage companies and Tractor Supply Co, which sells animal feed and farm equipment.

And there clearly are more sceptics in the market. Shares out on loan for the members of the S&P 500 Consumer Discretion­ary Index, an indication of short positionin­g against the group, are up to 3.7% on average from 2.7% at the beginning of the year, according to data from S&P Global Market Intelligen­ce.

The final months of the year are more crucial than ever for retailers, as the S&P 500 Retailing Index has lost more than 30% in 2022.

Soaring inflation is forcing shoppers to pay more for essentials, and that’s left stores stuck with a glut of excess products, causing retailers to mark down prices at the expense of profits.

Kohl’s Corp’s earnings report highlighte­d the uncertaint­y, as the discount department store withdrew its annual profit forecast and said that sales have slowed.

While Walmart’s quarterly results topped analyst expectatio­ns, it is taking a wait-andsee approach with its holiday projection­s.

US retail sales actually climbed the most in eight months in October, according to Commerce Department data released last week.

But sales at department stores still fell, and other key discretion­ary categories like electronic­s and sporting goods declined.

Looking ahead, Goldman Sachs surveyed 1,000 US consumers and found that nearly half plan to spend less this holiday season than they did last year.

One thing’s for sure: it will be a bumpy ride for investors in retail shares.

From 2011 to 2021, the average stock in Goldman’s basket of consumer companies saw a 2.9% move, in either direction, from the day before Thanksgivi­ng to the day following Cyber Monday, while the SPDR S&P 500 Trust typically moved 1.3%.

Investors will be closely watching quarterly earnings reports this week from Best Buy Co, Nordstrom Inc and several mall-based apparel retailers for further perspectiv­e on holiday sales trends.

It’s difficult to predict how the next couple of months will play out.

 ?? ?? Bumpy ride: A person waits to cross 5th Avenue with shopping bags in New York City. Soaring inflation is forcing shoppers to pay more, and that’s left stores stuck with a glut of excess products, causing retailers to mark down prices at the expense of profits.
Bumpy ride: A person waits to cross 5th Avenue with shopping bags in New York City. Soaring inflation is forcing shoppers to pay more, and that’s left stores stuck with a glut of excess products, causing retailers to mark down prices at the expense of profits.

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