The Macomb Daily

Holiday shopping looks anything but festive for retail stocks

- By Katrina Lewis and Jan-Patrick Barnert

Wall Street is starting to doubt that retailers can snap out of a yearlong 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 savior 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 selloff. Similar skepticism was seen in May when a slew of retailers cut their annual profit forecasts.

A cautious approach is understand­able. Target 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 projected the slowest holiday-quarter growth in its history, sending its market value briefly below $1 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 $2 billion in assets under management, sold its stakes in Target and Walmart in favor of more defensive consumer stocks, like beverage companies and Tractor Supply, which sells animal feed and farm equipment.

And there clearly are more skeptics 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 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-and-see approach with its holiday projection­s.

Target shares are down 30% this year through Friday’s close, while Kohl’s has slumped 37%. Walmart erased its loss for 2022 following earnings last week, and the stock is now up 3.8% for the year.

U.S. 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 (ticker SPY) typically moved 1.3%.

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

Stacey Widlitz, president of SW Retail Advisors, said it’s difficult to predict how the next couple of months will play out, with companies trying to sell through bloated inventorie­s as consumers curb spending.

“You’re definitely seeing a customer that’s being much more careful about what they’re buying,” she said. “It’s like the perfect storm for this holiday.”

 ?? BLOOMBERG PHOTO BY VICTOR J. BLUE ?? Shoppers walk past Saks Fifth Avenue in New York on Dec. 27.
BLOOMBERG PHOTO BY VICTOR J. BLUE Shoppers walk past Saks Fifth Avenue in New York on Dec. 27.

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