5 Retail Stocks Smacked by Higher Taxes

Higher taxes will hit these retailers hard as customers stay away

   

The great Benjamin Franklin once famously wrote, “In this world nothing is certain but death and taxes.” Well, today I’m going to invoke poetic license and modify Franklin’s famous quote by saying, “In 2013, nothing is certain but death and tax increases.”

As you probably know just by looking at your paycheck, there’s been a 2% increase in the Social Security payroll tax. That might not be a major hit to your wealth, but if you take that 2% from everyone’s pay out of the economy, you’re talking about a whole lot of dollars funneled into government’s pocket that no longer are available to be spent on goods and services that consumers choose for themselves.

Of course, the payroll tax isn’t the only increasing tax on Americans. The last-minute deal to avert the fiscal cliff showed us that bipartisan solutions on economic policy means more money out of the pockets of the most productive among us. For example, individuals making more than $400,000 or couples earning more than $450,000 will now pay higher federal taxes. Then there are the tax increases associated with the implementation of ObamaCare, which by some estimates will remove well over $100 billion from the economy.

Stocks most vulnerable

The country now faces automatic spending cuts tied to the so-called sequestration. And while I think forced spending cuts actually are good for the economy, I suspect that the “solution” to this problem is going to be increased revenue, i.e. higher taxes, in order to resolve the impasse and achieve what President Obama has consistently called a “balanced approach” to deficit reduction.

The bottom line here is that taxes are going up, and when taxes go up it hits stocks most sensitive to consumer spending. For investors, this means that consumer discretionary stocks are the ones most vulnerable to a smackdown from higher taxes.

So, which consumer discretionary stocks are most at risk from higher taxes? Here are five stocks that, if you own or if you’re thinking about owning, stand to suffer the wrath of an out-of-control federal leviathan.

Lowes

Home improvement retailer Lowe’s (NYSE:LOW) is a company trying to get its sea legs back after the nausea of sinking sales in 2012. The company did see a solid fourth quarter thanks to spending associated with Superstorm Sandy, but that’s a one-time boost for the retailer.

As taxes go up, consumers are going to have to be judicious with their home-improvement dollars, and that’s likely going to mean more money spent at rival Home Depot (NYSE:HD) than Lowe’s. The Dow component has seen increasing sales and revenue of late, and it’s clearly become the winner in the space. That’s bad news for Lowe’s, and for its ability to attract a substantive slice of the consumer discretionary spending pie.

Dollar General

Deep-discount retailer Dollar General (NYSE:DG) is a company that’s suffering mightily of late, as its bottom line has been challenged by slowing sales, shrinking margins and increased competition from retail giants Wal-Mart (NYSE:WMT) and Target (NYSE:TGT).

The payroll tax increase really puts pressure on Dollar General, as well as other stocks in the space such as Big Lots (NYSE:BIG) and Dollar Tree (NASDAQ:DLTR). All of these companies rely on sales to customers who can least afford to absorb a tax hike, and are vulnerable to the “new normal” of more money sent to Washington and less money in consumers’ pockets.

Garmin

These days, when you want to find directions to an unfamiliar destination you check your smartphone, not your external GPS device. That’s a bad trend for GPS navigation device leader Garmin (NASDAQ:GRMN).The company has struggled mightily to keep sales up, and its rather unimpressive Q4 earnings results showed just that. The stock’s performance over the past year, down 27%, also shows the out-of-favor nature of this device maker. It’s safe to say that an increase in the tax burden will do little to help Garmin navigate its way to a higher stock price, and it stands to suffer the wrath of restricted consumer discretionary spending.

Coach

Luxury leather goods retailer Coach (NYSE:COH) is the brand that I associate with accessible luxury for the average consumer. Over the past year, Coach hasn’t seen its brand resonate with shoppers, and that’s caused a lot of pressure on the company’s top and bottom lines. It’s also caused COH shares to fall some 37% over the past 52 weeks.

I suspect that a bigger tax burden on all Americans will make many shoppers even more reluctant to splurge on luxury brands, and that means less money in Coach’s purse.

Limited Brands

Specialty retailer Limited Brands (NYSE:LTD)owns and operates stores that sell lingerie, fragrances, cosmetics and even candles. And while these items are nice to have, they also tend to be areas where consumers cut back on during tough economic times. The company’s retail stores, including Victoria’s Secret and Bath & Body Works, teamed up to help LTD report solid fiscal fourth quarter earnings; however, the company dressed down its forecast for the first quarter. I think this lowered outlook reflects the tough environment for consumer discretionary stocks, a sector that is being negatively impacted by the ever-increasing tax bite taken out of Americans’ wallets by their own government.

The bottom line here is that with taxes going up, these five companies, as well as their respective share prices, will likely come under greater and greater pressure going forward. As such, let the buyers, and sellers, beware.


Article printed from InvestorPlace Media, http://investorplace.com/2013/03/5-stocks-smacked-by-higher-taxes-low-hd-gd-dltr-tgt-wmt/.

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