The retail sector closed at a six month low yesterday (XRT -3.4% vs. SPY -1.8%) amid a slew of retailers reporting quarterly results and there was weakness in the broader equity market. Today retail stocks, represented by the SPDR S&P Retail ETF (XRT 44.97, +0.97, +2.20%), are bouncing back.
The holiday shopping period kicks off in earnest on Black Friday, but the season has elongated in recent years, spanning almost all of November and December for some, as retailers attempt to compete in a world where shoppers are browsing online 24/7.
Retailers have generally posted strong results as US consumer spending is rather robust. As the war with Amazon has forced retailers to adapt to changing consumer preferences, some retailers have struggled and some have strengthened their business.
Last week, the Census Bureau reported that core retail sales grew 5% for the three months ending in October. Third party forecasts for retail sales this holiday are expected to grow in the 3-5% range.
While gross margin pressures have been evident as a result of more online sales and higher transportation costs, it seems investors are more concerned about the future. A broad group of retailers trade at ~15x this year's earnings, on average, which is a modest discount to the broader market.
The market is forward-looking and investors seem to be worried about whether sales growth is sustainable going forward. Tax cuts have boosted results this year, creating tough comps for 2019. The sizable consumer spending tailwind is likely to fade next year. This potentially difficult setup is impacting sentiment for the broader market as well, which has investors somewhat cautious heading into 2019 in general. Recall, consumption accounts for ~70% of the US economy.
Reports about retail sales and traffic will trickle out tomorrow and during Friday's shortened session, but those data points have become somewhat less relevant given the changing retail landscape.
Looking at some of the more notable retailers out this week:
- Target (TGT 69.12, +0.09, +0.13%) missed third quarter earnings, gross margin and same store sales estimates but results were still strong and the company reaffirmed guidance for the year. Margins were impacted by inventory being pulled forward as the company aims to take market share in the toy category since Toys-R-Us filed for bankruptcy. Target called for 5% same store sales growth in the fourth quarter after growing comp sales 5.1% in the third quarter. Target will provide a holiday update on January 10.
- Best Buy (BBY 61.23, -2.30, -3.62%) was one of the few retail stocks that traded higher yesterday. The nation's largest electronics retailer reported earnings and comparable store sales (+4.3%) above guidance for the fourth straight quarter. Fourth quarter EPS guidance was a bit soft, yet conservative. Best Buy management has done a phenomenal job investing in the business to enhance online offerings and the customer experience while remaining competitive on price.
- The second largest home improvement retailer, Lowe's (LOW 88.50, +2.32, +2.69%), reported weak results as there is still much work to be done for Marvin Ellison, the former Home Depot executive that took over during the summer. Investors are looking forward to financial targets expected at the December 12 Analyst Day.
- TJX (TJX 46.84, +0.02, +0.04%) beat third quarter estimates as comps grew 7%, well above +2-3% guidance. The company's typically conservative fourth quarter earnings guidance was below estimates but +2-3% comps sales forecast was in-line.
- Gap (GPS 5.38, +0.14, +2.67%) is trading higher today despite missing third quarter comp sales estimates (flat) and lowering earnings guidance for the year.
- Foot locker (FL 52.52, +6.43, +13.95%) shares are surging after the company reported upside third quarter results and guided fourth quarter same store sales growth in the low to mid-single digit range.