Retail Stock Rebound? Sector Could Be Moving Into Early Cycle Setup
This is a tenuous moment for retail.
Consumers have jobs, but inflation, high interest rates and the threat of recession have made them more cautious.
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And in the latest round of earnings, retail chief executive officers up and down the price spectrum noted the weakness, with lower-income shoppers pinching pennies and higher-income consumers less willing to make that “aspirational purchase.”
Martin Waters, CEO Victoria’s Secret & Co., might have summed it up best when he told analysts: “I don’t think that we have a single silver-bullet answer for why the market [in North America] turned so dramatically between Q4 and Q1, but we see it in the numbers across the board.”
For Wall Street, things are bad enough that retail might just start looking good again.
Historically, retail has been tagged as an “early cycle” sector on Wall Street — the idea being that merchants are so close to consumers that they are among the first to bounce back after a tough stretch. On the flip side, retail stocks are among the first to take a hit.
It’s the kind of pattern that’s easier to see in retrospect, at least with any precision. But Ike Boruchow, analyst at Wells Fargo, said the pieces are starting to fall into place for an early cycle revival.
In an analysis, Boruchow noted the companies he covers — including Capri Holdings Ltd., Lululemon Athletica Inc., the TJX Cos. Inc., Levi Strauss & Co., Nike Inc., PVH Corp., Ralph Lauren Corp. and others — have collectively underperformed the market over the past two years.
Stock multiples are down at historic lows at about 8- to 9-times estimates of price-to-earnings, or PE, ratios over the next 12 months. That’s down from a PE multiple of about 13-times at the start of the year and 21.2-times before the current downturn.
“This suggests that the multiple pain on the group has largely been felt, and further stock underperformance to come is more so likely on the revisions front,” said Boruchow, pinning future share declines on changes outlooks from the companies.
But retail can stay at the bottom for only so long.
The sector, which as been at “trough” multiples for three to four months, has stayed at the bottom for an average of four months over the last three downturns, according to the analyst, who pointed to the bursting of the tech bubble in 2000, the Great Recession in 2008 and COVID-19 in 2020.
“Looking at the prior three down cycles, multiples have always re-rated to roughly 15-times (from 8- to 9-times) six months following trough,” Boruchow said.
That doesn’t mean that the good times are absolutely coming to retail now — there’s still plenty of negativity in retail, especially with the debt ceiling bringing student loan payments back for 43 million people. But the stock setup could be getting better or, at least, shares might have fallen as much as they will.
“While the next three-to-six months are cloudy, when looking back at prior cycles we believe…the majority of stock pain has already been felt, we are likely in the later innings on the group’s sell-off,” Boruchow said.
Shares in his slice of the retail world have already fallen 40 percent from their high compared with the average drop of 45 percent during the last three big downturns.
“When looking at names that carry compelling multiples, balance sheets, market positioning and strategic vision — should the group begin to bottom, we believe the seven best names to own to play for material upside from here include: Burlington Stores Inc., PVH Corp., Capri, Ross Stores Inc., Signet Jewelers, Farfetch and Nike,” Boruchow said.
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