Retail stocks were hammered in late 2018 amid concerns that the global economy was slowing and that the global consumer was consequently losing confidence. The SPDR S&P Retail ETF (NYSEARCA:XRT) dropped 30% from early September 2018, to late December.
Then, the post-Christmas rally happened. Retail stocks, and the market in general, staged a huge turnaround the day after Christmas. They have stayed on a solid uptrend ever since because global economic fundamentals have started to stabilize and improve, while the global consumer has regained confidence in 2019.
All in all, the S&P Retail ETF is up 15% since Christmas Eve.
For the most part, this rebound in retail stocks should continue because the fundamentals continue to improve. Trade and FX headwinds are becoming less severe. The rate hiking headwind has turned into a accommodating monetary policy tailwind. Consumer confidence metrics across the globe, and in particular the U.S., are bouncing back. Job markets globally remain healthy. Wages globally are heading higher.
Overall, the economic fundamentals today continue to support a strong retail environment for the foreseeable future. Consequently, the early 2019 rebound in retail stocks should continue over the next several months.
Which retail stocks will lead this continued rebound? Let’s take a deeper look.
Category: Athletic Apparel
% Gain Since Dec. 24: 28%
Shares of global athletic apparel giant Nike (NYSE:NKE) have been on a tear in 2019. Since bottoming out in late 2018, Nike stock is up nearly 30%, and now trades at fresh all-time highs.
Why the big rally? Nike has continued to expand its dominance in the athletic-apparel category using faster-than-peer product innovation — an enhanced direct retail strategy — and unique marketing campaigns that have energized the core customer base. As Nike has done this, North America sales growth has come back into solidly positive territory. International growth has remained hot. Margins have recovered. And the whole company is back to firing on all cylinders.
This rally in Nike stock will continue because this dominance is nothing new. Nike has dominated the athletic-apparel scene for over twenty years now. Time and time again, competitors arise and threaten Nike’s dominance. Time and time again, Nike responds effectively, crushes the competition and only expands its dominance. This will continue to happen for the foreseeable future, and it will keep Nike stock on a long-term upward path.
Home Depot (HD)
Category: Home Improvement
% Gain Since Dec. 24: 17%
Shares of Home Depot (NYSE:HD) dropped big in late 2018 amid concerns that the U.S. housing market was finally cooling after years of red-hot growth. But as financial markets have rebounded in 2019, so has Home Depot stock. It’s up nearly 20% since late 2018.
Why the big turnaround? U.S. housing market fundamentals have stabilized and improved in 2019. Specifically, the Fed went from hawkish to dovish, and stopped hiking rates. That caused mortgage rates, which had been on a sharp run up in late 2018, to fall big in early 2019. Also, consumer confidence has bounced back, wages have continued to rise, the unemployment rate remains low, housing starts have come roaring back and home-improvement-related retail sales rose over 8% year-over-year in January 2019.
All these improvements will continue so long as U.S. economic fundamentals remain solid, which they should. Americans will keep buying and remodeling homes. And Home Depot’s sales and profits will continue to rise. As such, so long as the U.S. economy remains on solid footing, the rebound in Home Depot stock should persist.
Category: Home Improvement
% Gain Since Dec. 24: 20%
The story at Lowe’s (NYSE:LOW) parallels the story at Home Depot. The stock was killed in late 2018 on slowing U.S. housing market concerns. It’s rebounded in a big way in 2019 as housing market fundamentals have stabilized and improved.
Importantly, though, Lowe’s appears to finally be gaining share against Home Depot for the first time in a long time. For the past several years, Home Depot has consistently out-comped Lowe’s in a sign that Home Depot was gaining market share and Lowe’s was losing market share. But to end 2018, the gap between Lowe’s and Home Depot’s comparable sales growth was the narrowest it’s been in two years. In January 2019, Lowe’s actually out-comped Home Depot.
The implication? For the first time in a long time, Lowe’s is leveling the playing field with Home Depot and actually gaining share in the home improvement market. Lowe’s stock is still materially cheaper than Home Depot stock. As such, as home improvement stocks continue to rebound, Lowe’s stock could be the big winner.
Category: General Merchandise
% Gain Since Dec. 24: 26%
In late 2018, shares of Target (NYSE:TGT) fell off a cliff as investors were spooked by slowing comparable sales growth and compressing margins against the backdrop of a slowing U.S. economy. Target stock dropped big. But it’s also rebounded big since then, staging a 26% rally since Christmas Eve.
The turnaround in Target stock was powered by a few things. First, the U.S. economy stopped slowing and started stabilizing. Second, the U.S. consumer regained confidence in early 2019 and general merchandise retail sales rose 2.2% in January 2019. Third, Target reported solid holiday-quarter numbers that underscored that Target remains a healthy growth company with a red-hot digital business and stable margins.
This turnaround in Target stock will continue because the fundamentals remain favorable and the stock remains cheap. Given stable U.S. economic fundamentals and Target’s newly developed omni-channel retail presence, this company projects as a stable low single-digit revenue grower and high single-digit profit grower over the next several years. Yet, Target stock trades at just 13x forward earnings. That’s too cheap for that level of growth, meaning this rally in Target stock will persist.
Category: Health & Personal Care
% Gain Since Dec. 24: 46%
Shares of Ulta (NASDAQ:ULTA) have been on a roller coaster ride over the past several months. In late 2018, Ulta stock dropped nearly 30% in just over a month. In 2019, however, Ulta stock has rebounded by nearly 50% in just over two months.
The big selloff in late 2018 was the result of a below-consensus holiday-quarter guide converging on a rich valuation. The big rebound has been the result of the company blowing the lid off that below-consensus guide and reporting very strong holiday-quarter numbers. It also helps that comparable sales growth accelerated, margins expanded and the forward guide was strong — all against the backdrop of a resurgent U.S. consumer. Now, Ulta stock is now making new highs.
Ulta stock will continue to make new highs for the foreseeable future because this company is getting its groove back. New product launches in late 2018 helped reinvigorate comparable sales growth back to the near 10% range. These new product launches will continue to drive healthy customer enthusiasm and traffic gains through 2019. As they do, Ulta’s revenues and profits will continue to impress, and Ulta stock will stay on an uptrend.
Foot Locker (FL)
Category: Athletic Apparel
% Gain Since Dec. 24: 22%
Foot Locker (NYSE:FL) stock dropped big in late 2018 amid slowing U.S. economy concerns. But as the U.S. economy has stabilized, Foot Locker stock has rebounded.
The rebound in Foot Locker stock has been especially large (over 20% since Christmas Eve) because of a strong holiday-quarter earnings report that underscored healthy operating fundamentals for the company. Comps rose 10%. Margins expanded in a big way. Inventories fell. The guide was healthy. Investors cheered. Foot Locker stock popped.
In the big picture, Foot Locker’s numbers have been getting better for a long time now. Now, they are finally good again, and this tells me that the worst is in the rearview mirror for FL. Going forward, Foot Locker will remain an important and stable player in the athletic-apparel retail landscape. FL’s growth profile, coupled with the current 11x forward earnings multiple, should be enough to keep Foot Locker stock on a winning path.
Best Buy (BBY)
% Gain Since Dec. 24: 43%
In late 2018, there was a rumor flying around that the consumer electronics space was rapidly slowing. Consequently, shares of Best Buy (NYSE:BBY) dropped nearly 50% in a matter of three months.
That rumor was a bunch of hot air. In early 2019, Best Buy reported strong holiday-quarter numbers that included positive comparable sales growth, big digital sales growth, margin expansion and an above-consensus full-year guide. Those numbers were proof that Best Buy remains the leader in the still-growing consumer electronics space. Consequently, Best Buy stock rallied.
Still, Best Buy stock is pretty cheap at just 12x forward earnings. That’s too cheap for Best Buy, a company which should report positive comps and healthy margins for the foreseeable future thanks to secular tailwinds (the widespread emergence of IoT and AI technologies). As such, a cheap valuation and favorable growth fundamentals should keep BBY stock on an upward trend for the foreseeable future.
As of this writing, Luke Lango was long NKE, HD, TGT, FL, and BBY.