The US retail sector has been clobbered in recent weeks. Indeed, the S&P Retail Select Industry Index is on track to post its worst quarter since the 2008 financial crisis. The sector is down 21.2% so far in the fourth quarter, compared with a 12.2% drop for the broader S&P 500 over the same period.
Chart: S&P 500 Retail Sector vs S&P 500
The chart for the SPDR S&P Retail ETF (NYSE:XRT), which tracks the retail sector, looks just as bad. After hitting a fresh all-time high of $52.95 back in August, the ETF, and related sector, has now fallen about 22%, meeting the technical definition of a bear market.
S&P 500 Retail ETF
Few sector shares have been spared from the rout, with larger department store chains, mall-based retailers and even some e-tail names suffering to varying degrees. Despite what’s expected to be a huge holiday shopping season, investors have been quick to punish companies that have stumbled in an otherwise largely benign environment for retail.
Ultimately, smart retailers can capitalize on this backdrop, says Oliver Chen, managing director and senior equity research analyst at Cowen & Co:
“This season has greater predictability in terms of shopping behavior. Retailers understand how price sensitive customers are, so they can [be strategic] about promotion, they can plan good values.”
Below are three names in the retail sector that may enjoy a Christmas bounce this holiday season.
Target (NYSE:TGT) shares have been under pressure ever since the general merchandise retailer reported disappointing third-quarter results on November 20.
The Minneapolis-based company spooked investors when it posted weaker than expected earnings, as investments in its online business, higher wages in a tight labor market and price cuts hurt margins. Target also reported that comparable sales missed expectations.
Target expects it will deliver a strong holiday performance by expanding its toy department in more than 500 stores, offering two-day free shipping with no minimum purchases on thousands of items and accelerating the pace of store remodels. Another promising sign which should bode well for the future: online sales soared 49% in the third-quarter, outpacing the 41% rise seen in the second quarter and a 28% gain in the first.
With the stock sitting near levels last seen in January 2018, the stock closed at $64.32 yesterday, now could be the right time to scoop up shares. The stock is down 26.5% since the start of September and off almost 1.5% in 2018.
Despite posting upbeat Q3 2018 earnings on November 14, Macy’s (NYSE:M) shares have slumped as the omni-channel retailer became caught up in the recent bout of market turmoil, with much of the weakness tied to worries over the Trump administration’s tariffs on China.
The largest US department store chain, which has closed more than 100 locations and cut thousands of jobs since 2015, reported much better than expected profit and sales for the most recent quarter, boosted by double-digit growth at its online shopping service. Macy’s also raised its annual earnings forecast, signaling a strong holiday shopping season ahead.
Like many other major US retail names, Macy’s has been struggling with plummeting mall traffic and customer defections to a new range of online and fast-fashion stores. In response, the 160-year old company has invested heavily in its off-price Backstage stores, loyalty program, mobile app and website, while improving brick-and-mortar stores by equipping them with mobile checkouts and new boutique-shop layouts.
Currently trading at $30.28, Macy’s shares have dropped around 17% since the start of the fourth quarter. Still, they’re up about 20% this year.
3. Abercrombie & Fitch
Shares of Abercrombie & Fitch (NYSE:ANF) have been on the front foot lately, as investors reward the teen retailer’s ongoing efforts to overhaul its brand.
Abercrombie & Fitch Chart
Abercrombie has changed its namesake fashion brand in recent years, doing away with risque advertising and logo-emblazoned apparel, which fell out of fashion in the late 2000s. Instead, it has relied on its Hollister brand to generate the majority of its revenue, as its denim and Gilly Hicks intimates collections prove to be a hit with younger customers.
The New Albany, Ohio-based retailer last month promoted the head of Hollister, Kristin Scott, to the newly created position of Global Brands president. Stacia Andersen, brand president of Abercrombie & Fitch, would be leaving the company, it said.
Those efforts seem to be paying off. During its Q3 2018 earnings report on November 29, the company forecast same-store sales for the holiday quarter above analysts’ estimates, to be driven by strong sales at its Hollister and flagship stores. Ultimately, there’s a good chance that once again, the teen retailer will see long lines and packed stores.
ANF shares, which closed yesterday at $18.51, have fallen 14.5% during the fourth quarter. Nevertheless, they’re still up more than 6% in 2018.