A sharp decline in retail stocks since Black Friday provides an opportunity for investors still bullish on U.S. consumer spending.
The SPDR Standard & Poor’s Retail Exchange-Traded Fund -- made up of Wal-Mart Stores Inc. (WMT:US), Amazon.com Inc. (AMZN:US) and 100 other companies -- has lagged behind the SPDR S&P 500 ETF by 8.1 percentage points since Nov. 29, the day after Thanksgiving and kick-off to the traditional holiday shopping season. In two months, shares of retailers have erased about 50 percent of the relative gains of the prior 11 months, when this group led the broader market by 15 percentage points.
The sell-off in the retail ETF has been “unbelievably swift,” though it wasn’t accompanied by a similar deterioration in hiring and income growth, said Timothy Ghriskey, who helps oversee $1.5 billion as the chief investment officer at Solaris Asset Management LLC in Bedford Hills, New York. Rather, these two primary drivers of consumption were showing improvement, while holiday sales were “broadly in line with modest expectations.” Retail stocks “present an opportunity for investment because the consumer isn’t falling off a cliff.”
Total sales in November and December rose 3.8 percent from a year ago to $601.8 billion, compared with a projection of 3.9 percent, according to the National Retail Federation. Meanwhile, researcher ShopperTrak said spending grew 2.7 percent, higher than its estimate of 2.4 percent.
U.S. employers added an average of about 182,000 workers to payrolls each month in 2013, based on figures from the Labor Department. That’s just 0.3 percent below the 2012 average, the highest since 2005. Disposable personal income, the money left over after taxes and adjusted for inflation, averaged 0.2 percent growth in the six months through November, according to the most-recent data from the Commerce Department, after averaging no growth in the previous six months.
While the recent weakness in the retail group has been marked by some “pretty dramatic losses” -- Best Buy Co. (BBY:US)’s almost 41 percent (BBY:US) plunge and Express Inc. (EXPR:US)’s 30 percent (EXPR:US) decline - - there still are attractive options, Ghriskey said. He highlights outdoor sporting-goods chain Cabela’s Inc. (CAB:US), which has risen 7.1 percent, as one company he holds that’s bucking the ETF’s recent performance trend.
Even with a lot of “negative sentiment” about the holiday season, the sell-off in the ETF isn’t necessarily a harbinger of trouble for the U.S. economy or consumer spending, said Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore. Rather, it illustrates that investors must be more selective about stocks.
“There are systemic changes going on in the marketplace that favor companies with a robust online presence,” Lutz said, adding this “sea change” is hurting retailers very dependent on the bricks-and-mortar model.
Nonstore holiday sales -- an indicator of online and e-commerce shopping -- grew 9.3 percent in November and December to $95.7 billion, the retail federation said.
Lutz points to Netflix Inc. and Zappos.com Inc. as successfully taking market share from traditional retailers, while Amazon -- the giant in this industry segment -- is doing “absolutely great.” Sales for the Seattle-based company were buoyed by a shopping season marked by six fewer days between Thanksgiving and Christmas, as well as cold weather that kept many consumers at home, he said.
Its stock closed at $384.20 yesterday and is about 5 percent below a record high of $407.05 set last week.
Investors are becoming more selective after the retail ETF had “a tremendous run,” outpacing the SPDR S&P 500 ETF by 312 percentage points in the five years since it bottomed in November 2008, according to Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama.
“Money can still be made by investing in these retailers, but betting on the sector has gone away,” he said.
Companies that struggled don’t have a robust online presence and relied too much on heavy promotions during the holiday season, which took a toll on profit. At least six retailers -- including Pier 1 Imports Inc. (PIR:US) and L Brands Inc. (LB:US) -- cut forecasts in recent weeks.
Shares of home retailer Pier 1, based in Fort Worth, Texas, have fallen 18 percent (PIR:US) since Jan. 8, the day before it said earnings in the quarter ending March 1 will be 47 cents to 52 cents a share, down from a previous forecast of at least 60 cents. Columbus, Ohio-based L Brands, owner of Victoria’s Secret and Bath & Body Works, has tumbled 13 percent (LB:US) since the same day, before it said fourth-quarter profit will be about $1.60 a share, down from a previous forecast of at least $1.67.
If the labor market were to deteriorate -- particularly following a slowdown last month -- Hellwig might become more concerned about spending across all channels. Employers added 74,000 workers to payrolls in December, the fewest in three years and less than the most pessimistic projection in a Bloomberg survey.
“If the fundamentals for consumers weaken, that will have a negative impact on retail sales,” Hellwig said.
January hiring, scheduled to be released Feb. 7, rebounded to 180,000, according to the median estimate of economists surveyed by Bloomberg.
After “a tough season” that many investors were expecting, Lutz said he’s monitoring spending in January and February. That’s because a lot of consumers purchase items in the weeks following Christmas with gift cards, so shopping may revive, giving retailers a post-holiday boost.
Retail sales increased 0.2 percent in December, following November’s 0.4 percent rise, according to Commerce Department data, marking nine consecutive months of gains. January figures are scheduled for released Feb. 13.
So investors may be wise to see how earnings pan out when many of these companies report quarterly results in the next few weeks, Ghriskey said.
Even as they become more selective, Hellwig cautioned investors shouldn’t ignore consumers, whose spending accounts for about two-thirds of U.S. growth.
“The easy money in retail stocks was made coming out of the recession,” he said. “But retailers won’t be abandoned.”
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