By Teresa Rivas
For specialty retailers, it is never too early to start thinking about the holiday period, especially given that the jury is out on how generous Santa will be this year.
As so often has been the case in recent years, there are mixed signals on the consumer front. Inflation, though cooling, has still left the cost of many essentials well above their prepandemic levels. Consumer confidence rose for the second straight month in the most recent data set, out last week, its highest reading since May, but that was off a low base. Americans remain relatively downbeat about the economy as a whole.
Add in jitters around the presidential election and the stage is likely set for "an uncertain second half, with potential for a weaker-than-expected holiday selling period and softer demand generally led by lingering inflation," as William Blair analyst Dylan Carden puts it. For retailers already hampered with somewhat higher inventories compared with last year, there may be plenty of disappointment to go around.
In this environment, Carden argues that investors should be looking for retail stocks that fall into two categories. The first is defensive plays, such as Amazon.com and the off-price retailers that Barron's has argued look attractive as consumers heavily favor value.
The second are those that are likely coming up on their own company-specific turning points. These companies, which can benefit if their performance improves relative to the past regardless of what happens in the broader economy, "are in the early innings of upward numbers revisions," he argues.
A few of those already began making strides in the second quarter, their latest results show, but still look attractive, Carden believes.
Shares of Chewy are up nearly 90% over the past six months, including a 16% climb over the past month, but the pet-supplies seller is still one of his top picks because he believes there's still too much negativity around the name. With more cash on hand, evidence of a recovery in the early stages, and a growing consumer base, 2024 will mark a change for the better for the stock, he argues.
Likewise, Barron's favorite Boot Barn has more than doubled since the start of the year, but its shares "still present a compelling opportunity," Carden writes. Not only did the company return to growth in terms of same-store sales in the second quarter, but that momentum provides a level of confidence about shoppers returning to its stores after the tougher pandemic years.
He said that same-store sales growth, accelerating in the third quarter, plus opportunities to tap new markets and boost margins, "cements this name as a must own into the balance of the year, even trading at 24 times our fiscal 2026 earnings per share estimate."
He also upgraded Torrid to Outperform -- the rating he has on both Chewy and Boot Barn -- as he believes the stock can roughly double over the next six to 12 months,. He cited positive comparable sales and "myriad initiatives for marketing and inventory management, efficiency, and pricing" as factors that will lead analysts to raise their forecasts for earnings.
By contrast, he kept Market Perform ratings on Zumiez, Designer Brands, Duluth Trading, and Warby Parker. "We see encouraging signs at Zumiez but believe valuation accounts for much of the potential earnings recovery ahead," he noted. Warby Parker, Designer Brands, and Duluth Trading are worth watching, given they appear to be "in earlier stages of inflection," he wrote.
While December still feels a long way off, that doesn't matter much for retail, given that the shopping kickoff has been pushed up to October for Amazon and the major big-box chains. Retailers that can buck worrisome trends are on everyone's wish list.
Write to Teresa Rivas at teresa.rivas@barrons.com
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(END) Dow Jones Newswires
September 18, 2024 08:57 ET (12:57 GMT)
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