Just how Mariah Carey awakens from her slumber this time each year to soundtrack the holiday season, retail stocks take centerstage on Wall Street between Thanksgiving and Christmas. The sector is at a fascinating crossroads heading into the holidays, with several conflicting data points that break depending on how one views the U.S. economy. The SPDR S&P Retail ETF (XRT) is up 5% year-to-date — a breath of fresh air from the ETF’s 33% loss in 2022 — but the last three months of stock market weakness took the wind out of the summer sails. Only after a slew of upbeat corporate reports in the last few weeks — which we’ll unpack below — did XRT return to the black for the year. Regardless of how you view this fickle sector, the dominos are in place for many in the sector to end 2023 with a crescendo.
The overall sector’s health depends a lot on how you view the broad-market economy. Retail sales in October fell by a lower-than-anticipated amount and shopping always ramps up in store (and online) this time of year, so that’s a tailwind, right? Not so fast, because many in the industry see inventory drawdowns that could damper the holiday spirit. For every yin, there seems to be a “yeah, but” yang –yeah inflation is trending lower, but consumers are being more cautious with their money. “We are definitely seeing signs that the consumer is starting to pull back … and businesses know that.” Jeffrey Roach, chief economist at LPL Financial, said in an interview. “So they’re putting their best foot forward with fairly aggressive discounts.”
The good news is that the retail sector always has its finger on the pulse of the consumer, and they’re already adapting. Did you miss out on Black Friday deals, bedridden by a tryptophane coma? No worries, because nowadays, the term ‘Black Friday’ is semantics with how retailers are extending their sales before and after. Retailers from all different sectors have made the whole week prior to Black Friday available for discounts, a move in lockstep with the consumers’ current spending habits.
Per Target (TGT) Chief Growth Officer Christina Hennington: “If there’s one thing that we’ve seen is in an environment where people are making choices and they might have some constraints with their budget, the motivation to buy is, really, is this going to add value to my life?” Retailers are taking it in stride; the Bureau of Labor Statistics reported that toys, games, and hobby gear are on track to be less expensive this holiday season for the first time since 2020, while sporting goods prices are down this holiday for the first time since 2018.
If retail can prove resilient to the budget-conscious consumer this fall, they can build off an outstanding turn in the most recent earnings confessional, overall. Per Nasdaq.com, broadline retail, a subset of consumer discretionary, recorded a whopping 324% earnings growth year-over-year, the highest at the industry level. Consumer discretionary itself experienced the second-highest earnings growth year-over-year at 41.8%.
Pulling most of that weight was sector heavyweight Amzon.com (AMZN), which gapped higher by 6.8% on Oct. 27 after a top-line beat driven by absurd ad sales growth. Other winners include Target (TGT), which logged a post-earnings bull gap of 17.8% on Nov. 15 after its best corporate report since the pandemic. Home Depot (HD), Dick’s Sporting Goods (DKS) scored post-earnings pops of 5.4% and 2.2%, respectively. The biggest winner of them all though was Gap (GPS), which added 30.6% on Nov. 17 after a top-line beat.
Even stocks that have struggled in 2023 got a much-needed boost this fall after earnings. Consider Schaeffer’s Top 2023 pick Macy’s (M), which added 5.7% after earnings on Nov. 16 thanks to a surprise profit and raised guidance for the fourth quarter. While M is 28% lower year-to-date, it has now staged a bounce off its Oct. 13 three-year low of $10.54. If $10 is indeed a springboard, the shares’ 200-day moving average is a ceiling, a trendline that hasn’t been toppled on a closing basis since early March. But given the encouraging report and 11.6% of its total available float sold short, clearing that hurdle could set up Macy’s stock for a Santa Claus rally that helps pare its 2023 deficit.
It wasn’t all winners, of course. Urban Outfitters (URBN) on Tuesday night reported earnings and revenue above expectations, as its Nuuly brand finally achieved a profit. Investors were rewarded with a 12.4% drawdown on Wednesday, as shareholders and analysts instead harped on a lackluster guidance for the fourth quarter. While TGT broke out, Walmart (WMT) suffered a 8.1% post-earnings bear gap thanks to a softened outlook. Overall though, there were no corporate reports that were so bad they altered the sector’s landscape, a feather in the cap for retail heading into the holidays.
Since options traders tend to lead the way to trends, it appears they’re leaning into the retail revival. XRT’s 10-day buy-to-open call/put ratio of 0.51 on the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands higher than 84% of annual readings. So while puts still outflank calls on an absolute basis, the high percentile suggests the ratio is on an uptick that nears an annual high rate.