Back in March I began talking about the strength in consumer stocks, particularly brick-and-mortar names. Of course, most financial analysts had written off the brick and mortars as victims of the Amazon (NASDAQ:AMZN) era and the lingering impact on consumer behavior in the aftermath of the Great Recession.
The Consumer Discertionary Select Sector SPDR ETF (NYSEARCA:XLY) has been on fire for some time now, powered by companies mostly associated with technology: Amazon and Netflix (NASDAQ:NFLX).
But by the same token, consumers have become increasingly loathe to pay up for things like underwear and canned soup. This led to a sharp decline in the sector, but that selling has stopped and maybe even reached an inflection point.
Because of cash flows, the hundred-year-old brands with global reach have become more attractive. Moreover, some are even seen as value investments, especially in brick-and-mortar retail.
Not surprisingly, earnings for brick-and-mortar retailers were just fine, with several crushing estimates and taking off like rockets. In reality, this would be the second or third stage of liftoff for many of these retail stocks, which have been on fire since early spring when they pulled away from the Dow Jones Industrial Average.
The SPDR S&P Retail ETF (NYSEARCA:XRT) is now up more than 30% in the past year, which has doubled the performance of the blue-chip Dow Jones Industrial Average. That’s a pretty solid performance right there.
Retail Stocks: Nordstron (JWN)
One great example of consumer strength in brick-and-mortar names is Nordstrom (NYSE:JWN). On Aug. 16, the company posted monster earnings results, driving the stock up more than 14%. JWN saw its best comparable-store sales in three years, and management sees profits at an inflection point. I’ve included a quick breakdown of the numbers below.
• Sales: +7.1%
• Comp-store sales: +4%
• Digital: +23%; now 34% of total sales (up from 29%)
• Management raised guidance on revenue and earnings
I believe this trend increases and peaks with a round of consolidation in brick-and-mortar retail as internet companies begin to build out a physical presence. Keeping all that in mind, I think JWN is worth chasing at current levels.
Retail Stocks: Macy’s (M)
Macy’s (NYSE:M) reported results that crushed estimates, with earnings of 53 cents per share topping the expected 36 cents. Excluding one-time items, M posted earnings of 70 cents a share. However, revenue declined 1.1% to $5.57 billion, and while this was still higher than the Street’s estimate of $5.55 billion it scared off investors concerned about the company’s recovery.
The stock sold off about 15%, but I believe investors are being short-sighted right now given the positive longer-term retail trends. I view M as a good buy on dips.
Retail Stocks: Dillard’s (DD)
Dillard’s (NYSE:DDS) reported on Aug. 16 and fell over 8% despite having a solid quarter. An earnings loss of 10 cents per share was much narrower than the anticipated loss of 58 cents. Revenue was also solid, coming in at $1.5 million, slightly ahead of the expected $1.4 million.
However, investors didn’t like that DDS management decided to not issue guidance for the second half of the year. Comparable sales growth of 1% was also a little weak and there are concerns that the retailer will struggle more if the economy declines since it’s still reporting quarterly losses. Given the lack of earnings visibility and somewhat weak sales, I would hold off on DDS for now.
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