With the Federal Reserve poised to raise interest rates before summer’s end, historical data suggests the impact on retail stocks is likely to be mixed.
Mass retailers are in the best position to withstand a rate hike. And this time around, specialty retailers could fare better.
According to an April 28 research report by the consumer group at Piper Jaffray, analysts Jeffrey Klinefelter and Neely Tamminga concluded that same-store sales and, subsequently, stock performance, should stay unaffected for specialty retailers up to a year after a rate increase. They attributed this to leaner inventories at retail. What’s also different this time around are improved fundamentals in sales per square foot and gross margin rates.
Among women’s specialty apparel retailers, as well as those in the luxury business, the trend-line results mirrored the teen specialty retailers. Women’s retail stocks benefited from a strong economy from 1999 to 2000, but then showed some slack in 2001, following the Sept. 11 terrorist attacks in New York and Washington.
On the mass merchant side, the retailers seemed insulated from changes in interest rates, according to the survey by the Piper Jaffray team. Klinefelter and fellow analyst Ted Saunders concluded the nondiscretionary component of the mix of products sold by mass merchants buffered the impact of rate fluctuations. In short, it didn’t really matter what the rates were because personal care products and food are everyday items consumers need, regardless of the economic climate. An added advantage the mass merchants have is a consumer group covering a very broad cross section of the population, leaving them less reliant on any one demographic type or income level.
Shari Schwartzman Eberts, analyst at J.P. Morgan, concluded in her April 26 note: “According to our historical analysis, department stores and discount stores typically underperform the [Standard & Poor 500 Index] when rates are rising, and outperform when rates are declining.”
Schwartzman Eberts concluded that, if the same trends continue, a higher growth stock such as Dollar General — J.P. Morgan’s favorite in the sector — may be the “safest” name in the broadlines group.
— Vicki M. Young