Wall Street is beginning to doubt retail suppliers’ ability to recover from a yearlong stock-market downturn as consumers tighten their pockets ahead of the important holiday shopping season.
Retail stocks have had a rough 2022. And fourth-quarter sales, which are normally the strongest of the year, may not be a savior this time around, as more businesses and chains warn that frugal buyers will cut into their bottom lines.
Some traders are definitely betting against the sector or hedging against even bigger losses.
Trading activity in bearish put options for the consumer discretionary sector has recently increased, with turnover currently approaching that of the March 2020 pandemic selloff. A similar level of mistrust was seen in May when a spate of retailers reduced their annual profit estimates.
It’s understandable to be wary. Target Corp. fell after reporting that sales trends slowed in October, citing weakness in major gift categories like toys. The National Retail Federation also expected that Christmas sales will expand at a far slower rate than the previous year. Amazon.com Inc. forecast the worst holiday-quarter growth in its history, causing its market capitalization to fall briefly below $1 trillion.
The negative report indicates how much inflation, mounting economic uncertainty, and rising interest rates are putting a damper on holiday spending plans.
“The customer will be seeking for deals, which will certainly put pressure on margins,” said Mark Stoeckle, chief executive officer of Adams Funds. “So, if you think that, why are you holding these stocks now?”
During the third quarter, the firm’s Adams Diversified Equity Fund, which manages approximately $2 billion in assets, liquidated its holdings in Target and Walmart Inc. in favor of more conservative consumer firms such as beverage companies and Tractor Supply Co., which sells animal feed and farm equipment.
There are certainly more skeptics in the market. According to data from S&P Global Market Intelligence, shares out on loan for members of the S&P 500 Consumer Discretionary Index, a sign of short positioning against the group, are up to 3.7% on average from 2.7% at the start of the year.
The final months of the year are more important than ever for retailers, as the S&P 500 Retailing Index is expected to fall by more than 30% in 2022. Soaring inflation is pushing buyers to pay more for necessities, leaving stores with a surplus of extra inventory, prompting retailers to mark down prices at the risk of earnings.
The uncertainty was emphasized in Kohl’s Corp.’s results announcement when the discount department retailer lowered its annual profit prediction and said sales had slowed. While Walmart’s quarterly performance is above analyst estimates, it is holding off on making holiday projections.
Target stock is down 30% this year as of Friday’s close, while Kohl’s is down 37%. Following earnings last week, Walmart erased its 2022 loss, and the stock is currently up 3.8% for the year.
According to Commerce Department figures released this week, US retail sales increased the most in eight months in October. However, department store sales plummeted, as did sales in other major discretionary categories such as electronics and recreational goods. In terms of the future, Goldman Sachs polled 1,000 US customers and discovered that over half plan to spend less this holiday season than they did last year.
One thing is certain: individual share investors are in for a rocky trip. From 2011 to 2021, the average stock in Goldman’s consumer basket moved 2.9% in either direction from the day before Thanksgiving to the day after Cyber Monday, while the SPDR S&P 500 Trust (ticker SPY) moved 1.3%.
Investors will be scrutinizing quarterly earnings reports from Best Buy Co., Nordstrom Inc., and numerous mall-based apparel stores this week for more insight into holiday sales trends.
According to Stacey Widlitz, president of SW Retail Advisors, it’s tough to forecast how the next several months will unfold, with retailers attempting to move through bloated inventories as customers cut back on spending.
“You clearly notice a customer who is a lot more cautious about what they buy,” she said. “It’s like the ideal holiday storm.”
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