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HomeMarket3 Retail Stocks That Have Soared. Further Gains Might Have to Wait.

3 Retail Stocks That Have Soared. Further Gains Might Have to Wait.

Lowe’s same-store sales for the latest quarter were higher than expected.

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David Paul Morris/Bloomberg

Retail stocks—and earnings—are showing signs of life. But even though it is retail’s busiest season, this isn’t a great time to buy. 

Shares in retail companies, as measured by the
VanEck Retail exchange-traded fund
(ticker: RTH), have gained 15% since late May, their lowest point of the year. The ETF has beaten the
S&P 500
by 12 percentage points over that period.  

But some concerns have emerged anew. Heading into the holidays, the retail sector has too much inventory at the wrong time. Consumer demand is waning amid high inflation and rising interest rates, putting pressure on some retailers to mark down prices, hurting sales and profit margins.

Positive earnings reports, though, are giving investors enough confidence to look past those problems.

TJX
‘s latest earnings, released Nov. 16, showed the company was able to manage expenses effectively. Its operating margins were better than expected even though sales were weaker than anticipated. Its inventories weren’t a catastrophic problem, either. Overall sales only dropped 3% from a year earlier, while they increased 3% at the retailer’s Marshall’s and TJ Maxx stores.

That sent shares to a record high of just over $80, which is up 46% from their 2022 lows of just under $44, hit in May.

“The company is very comfortable with its inventory position and is set up extremely well to deliver an ever-changing assortment of exciting brands and gifts to its stores and online this holiday season,” TJX’s management said at the time.

Telsey Advisory Group analysts said the company is using the surplus of inventory in the industry at large to expand its product assortment, keeping shoppers walking through the doors. In our cover story this past week, reporter Sabrina Escobar pointed out that off-price retailers like TJX can take advantage of the oversupplied environment. 

Lowe’s (LOW) and
Home Depot
(HD) have executed well, too. 

Lowe’s posted sales of $23.5 billion, better than the expected $23.1 billion. The company’s EPS came in at $3.27, above expectations for $3.09. Driving the outperformance was same-store-sales growth of 2.2%, above the expected 0.8%. The company’s higher-margin Pro business, which is centered on contractors buying goods for home remodelings, grew 16% year over year. Cowen analysts noted that Lowe’s Pro business is taking market share as the company catches up to Home Depot in that business. Lowe’s stock has risen about 23% from its low point this year.

Home Depot’s sales of $38.8 billion, meanwhile, beat expectations for $38 billion. Its EPS of $4.24 was comfortably above the $4.12 analysts had expected, driven by same-store-sales growth of 4.2%, higher than the expected 3.1%.

Although Lowe’s is performing well in the Pros business, Home Depot is still growing, as it benefits from higher pricing and growth in the business serving contractors outpaces that in the do-it-yourself space. The stock is up 21% from its bottom. 

But there is a key risk to retail stocks. Shares are up a lot from their lows, while consumer demand could get worse. The Federal Reserve’s increases to interest rates are designed rein in inflation by reducing demand, including among consumers, and the full effect of a rate increase takes time to register.

That means retail stocks just aren’t screaming buys at these levels. TJX, Lowe’s, and Home Depot are on Macro Risk Advisors’ list of names that face relatively high near-term risk.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

Credit: marketwatch.com

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