Although retail has performed well this year, the outlook is getting more complicated, but discounters can still see gains, according to
Where we were: The
SPDR S&P Retail ETF
(ticker: XRT) rose more than 7% in 2018, while low-cost retailers posted double-digit gains.
Where we are going : Stricter comparisons and weaker overseas demand are among Wells Fargo’s concerns with the industry, but the company remains bullish on discounters.
Although we are on the eve of the third quarter earnings season, few retailers have done so yet. Wells Fargo’s Ike Boruchow looked at the non-price segment, both
TJX (TJX) and
Ross Stores (ROST) are expected to report on November 20, and
Burlington Stores (BURL) follows in December and warns that headwinds persist.
Boruchow has previously said the outlook is darkening for retail. He believes sales growth will slow over the next year, as improved performance has raised the bar. At the same time, he says, concerns about exposure to weaker environments in Europe and China, as well as currency pressures, will weigh on big brands. Meanwhile, there is a lot of wage pressure in the industry, as input costs rise and tariffs remain a wild card on the downside.
Then, of course, there is e-commerce. As traditional store traffic trends have picked up this year, online shopping continues to climb, meaning the pressure to create a digital presence and seamless experience spanning both bricks and clicks will remain.
Yet, this is not all bad news. Like the rest of the market, retailers were pushed around in October, making inventory more attractive, and traffic improved last month compared to a tough September (albeit at the cost of higher promotions).
Moreover, Boruchow believes, the non-price model will remain more resilient than other segments of the retail sector. He upped his estimates for the top three players, saying he expects TJX, Ross and Burlington to deliver beaten quarters and rise and trade higher because “they present defense, visibility and low rate risk. “.
Boruchow reiterated the overweight ratings on Burlington and Ross, with price targets of $ 178 and $ 105. However, he is pricing TJX at market weight, with a price target of $ 112, as he believes cost headwinds may not dissipate as quickly as investors are hoping.
TJX saw the group’s strongest gain of the year to date, up 42.8%, compared to 39.7% for Burlington and 25.8% for Ross.
To make the connection
Wells Fargo isn’t the only company skeptical of popular discretionary stocks.
Tapestry’s Chief Financial Officer (TPR) leaves the company.
Write to Teresa Rivas at [email protected]