Retail stocks have joined the broader market in a turn south lately, but they are still outperforming handily year-to-date.
The Retail SPDR (XRT), for one, is nearly doubling the S&P 500 ETF‘s (SPY) double-digit 2013 gains, while funds like the Market Vector Retail ETF (RTH) and the PowerShares Dynamic Retail EFT (PMR) have also been solid performers.
Take a look:
The real question, though, is whether retail stocks can keep climbing. And the answer is far from clear.
Let’s start with the skeptics. In the bear’s corner, we have some not-so-hot numbers on the consumer sentiment end, as the index declined and missed expectations badly just last week. Plus, there’s shaky wage growth and a shaky overall stock market — as we’ve seen — to be wary of.
And for the icing on top, we can’t ignore a hefty pile of slipping outlooks from companies in all corners of the sector. I first pointed to this trend back in March, when names from laggard Abercrombie & Fitch (ANF) to leader Express (EXPR) provided worse-than-expected forward-looking numbers.
Analysts have been adjusting their expectations in the meantime, and it hasn’t been pretty. The consensus EPS for Target‘s (TGT) current quarter has dropped by 10% over the last three months, while rival Walmart‘s (WMT) has slid 3%, as has discounter Dollar General‘s (DG).
Not to mention eye-popper Aeropostale (ARO), which is now expected to post a twice-as-wide a loss, or Ann Inc. (ANN), whose EPS consensus has dwindled by around 7%.
Those numbers — along with weather-blamed weakness earlier in the year, for some companies — are dragging down full-year forecasts as well. Just consider this sample of nine companies, comparing analyst full-year earnings estimates from three months ago to those of today:
|Company||Ticker||2013 EPS Estimate
(90 Days AGO)
|2013 EPS ESTIMATE (NOW)||%Change||2013 P/e|
All in all, analysts have been lowering their bar for a large chunk of retail names … mostly in response to corporate management doing the same.
Sounds like the bears have a pretty compelling case … no?
Well, the good news is that those lowered outlooks seem to have already been built into stock prices to a large extent — whether intentionally or not. Taking a look at the right-hand column of the above chart, you can see that based on the listed full-year earnings estimates, valuations aren’t too too high for most names on the list, likely thanks to the recent selloff.
The S&P 500’s average P/E is currently sitting at 18, while this selection averages a P/E of 19 — hardly significantly overbought, especially for such a booming sector.
And not bad for a sector many experts — despite the aforementioned concerns — remain bullish on.
To start, consumers have proven resilient so far this year in the face of retail headwinds. Despite tax increases, spending cuts and oft-scapegoated bad weather — all of which led to plenty of alarmist headlines — retail stocks have been doing all right.
That makes it seem likely consumers will also be able to survive other factors many have been fretting over, like the stock market’s recent cool-off and the subsequent waning of the oft-touted wealth effect. Additionally, InvestorPlace Editor Jeff Reeves’ recent concerns about cuts to food stamp funding are a nonissue with Farm Bill’s failure.
To top it off, June consumer confidence surged to a five-year high yesterday … and that comes not long after recent May retail sales tallied their largest gain in three months. In fact, Lynn Franco, director of economic indicators at the Conference Board, said the report “suggests the pace of growth is unlikely to slow in the short-term, and may even moderately pick up.”
In the end, it can’t hurt — especially in light of the aforementioned outlooks and valuations — to get selective if you decide to go shopping for retail stocks.
But as a whole, lowered outlooks seem to be a wash considering the market’s recent cool-off … and consumers still look ready to spend in the coming months.
As of this writing, Alyssa Oursler was long RTH. Follow her on Twitter: @alyssaoursler.