It’s summertime and the living is easy(ish) — at least for the moment.
The economy is expanding at a 4.1 percent clip, unemployment is low at 3.9 percent and sales are rising, with the National Retail Federation now predicting a top-line retail gain of at least 4.5 percent this year — the strongest growth since 2011.
But don’t expect retailers to sound too celebratory as second-quarter earnings start to roll out in earnest Wednesday, with Macy’s Inc. the first of the broadline companies to report results.
Wall Street is also in a cautious mode regarding the sector and betting on value to pull through.
Of the 11 major retailers set to report results through the balance of this week and next, only three are rated “outperform” by analysts — off-pricers Ross Stores Inc., TJX Cos. Inc. and discount and now online giant Walmart Inc., according to S&P Capital IQ.
The rest are rated “hold” with the weakest scores assigned to the debt-laden J.C. Penney Co. Inc. and the largest specialty players including Gap Inc. and the struggling L Brands Inc.
In between are companies such as Macy’s Inc., Kohl’s Corp., Target Corp., Nordstrom Inc. and Urban Outfitters Inc., which have seen the biggest stock gains so far this year, but have yet to prove they can go higher still.
Most companies face easy comparisons with a year ago, when the bottom seemed to be falling out in retail.
Now, retailers in general are doing better with a smaller base — having scuttled thousands of stores last year — and some are starting to find niches in an online world dominated by Amazon, but the sector’s transformation is still very much under way, with stores still syncing back up with consumers.
And there are storm clouds on the horizon with no signs of President Trump’s trade war with China abating. Retailers are rushing to get Chinese-made goods into the country before tariffs go up, but when and if duties do rise, many companies will find themselves having to hike prices on consumers to compensate.
Bill Lewis, director of AlixPartners’ retail practice, said retailers are likely to hold their outlooks steady.
“If they had a healthy first half of the year, the analysts will be asking [on conference calls with management] about potential raises in guidance,” Lewis said. “You’re going to hear cfo’s and ceo’s try to moderate their expectations for Q3 and Q4.”
Retailers are extremely wary of the prospect of tariff increases and looking to diversify their supply chains away from China, waiting to see how the trade war plays out against the broader economic backdrop.
And there are other areas of concern. “There’s some noise around consumer debt right now, but I’m not really hearing any impact from that noise,” Lewis said.
The retailers most likely to continue to gain and win the future are those that have figured out their digital proposition or are starting to.
While at least some in recent years thought retail was going to be eaten whole by Amazon, a more natural balance seems to have been reached.
“There’s only one or perhaps two that want to try to compete head-to-head [with Amazon],” Lewis said. “Everyone else has to figure out their niche or value proposition in the world of Amazon, that’s why you see the evolution now.”
The Value Play
|Analysts have zeroed in on the value players — including Ross Stores, TJX and Walmart — as the best retail stock bets.|
|Company||Analyst Rating||Year-to-Date Change in Stock Price||Projected Second-quarter EPS (Adjusted)||Projected Change||Reporting Date|
|Ross Stores Inc.||Outperform (1.92)||13.1%||$1||22%||Aug. 23|
|TJX Cos. Inc.||Outperform (1.96)||29.6%||$1.05||23.5%||Aug. 21|
|Walmart Inc.||Outperform (2.3)||-9.1%||$1.22||13%||Aug. 16|
|Kohl’s Corp.||Hold (2.59)||35.6%||$1.64||32.3%||Aug. 21|
|Target Corp.||Hold (2.68)||22.3%||$1.40||13.8%||Aug. 22|
|Urban Outfitters Inc.||Hold (2.69)||32.3%||77 cents||75%||Aug. 21|
|Nordstrom Inc.||Hold (2.79)||7.8%||84 cents||29.2%||Aug. 16|
|Macy’s Inc.||Hold (2.84)||52.3%||50 cents||4.2%||Aug. 15|
|L Brands Inc.||Hold (2.86)||-48%||35 cents||-27.1%||Aug. 22|
|Gap Inc.||Hold (3)||-8%||72 cents||24.1%||Aug. 23|
|J.C. Penney Co. Inc.||Hold (3.06)||-29.7%||-3 cents||vs. loss||Aug. 16|
|Rating Scale: 1 = buy, 5 = sell|
|Source: S&P Capital IQ|