Why Are US Retail Stocks Tumbling Despite a Strong Economy?
Retail companies in the US are facing challenges as consumers become more cautious with their spending. Over two dozen stocks in the consumer staples and discretionary sectors of the $S&P 500 Index(.SPX.US$ have hit new 52-week lows in October, including $Dollar General(DG.US$, $Target(TGT.US$, $The Kraft Heinz(KHC.US$ and $Colgate-Palmolive(CL.US$.
Here's why they are struggling.
Consumers feel financially constrained
Higher gasoline prices, tighter credit conditions and sticky inflation are beginning to catch up with many consumers. Consumer sentiment drops for two consecutive months as Americans feel worse about the economy.
Dollar General and $Walgreens Boots Alliance(WBA.US$ are among the companies that have said its customers are buying fewer discretionary items. Dollar General on Thursday lowered the top end of its earnings and sales guidance for the year.
Shrink remains a problem
Another problem that can also hurt earnings reports for retailers this year is a rise in theft and inventory losses, known as shrink. Last month Target announced it would be closing nine stores in major cities due to concerns relating to theft and violence. $Nike(NKE.US$ also recently closed its flagship Portland location as it faced similar challenges.
Rising treasury yield
Plus, the dividends on some of the stocks look less appealing now that the yield on the 10-year Treasury is hovering above 4.7%. Dollar General and Target have dividend yields of 2.1% and 4%, respectively, while Kraft and $Conagra Brands(CAG.US$ come in above 5%.
However, some of these stocks now have more appealing valuations after the recent pullback.
Despite the current difficulties, money managers are looking at companies that can withstand changes in consumer behavior and opting for stocks that have increased their dividends throughout business cycles, such as Nike, Polaris, and Mondelez International.
So we're focusing more on companies that can withstand the macro tailwind with attractive valuations. This way, we' re not banking on the consumer staying resilient," said Matt Dmytryszyn, chief investment officer at Telemus Capital.
Source: WSJ, The Motley Fool
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Ixy The Cat : The "Strong Economy" in the title is incorrect to begin with. Inflation in the US and Eurozone is not under control. Inflation eats away at consumer discretionary spending and corporate profits. It also means higher borrowing costs for individuals already struggling with high debt levels and companies who are highly leveraged. With limited upside, retail related stocks get relegated to being defensive stock plays. It won't get better anytime soon as investors switch to other higher performing sectors.