While the widespread fears of recession have faded, Goldman is concerned that the "setup actually appears tougher" for the retail/discretionary portion of its coverage.
4 Concerns
Goldman has put out four concerning factors for the retail stock outlook.
1. Energy Pricing Peak Analyst Matthew Fassler said, "The decline in energy prices appears to have peaked," and "energy is likely to have a diminishing contribution to consumer discretionary cash flow over the course of the year, and into 2017.""We model only gradual moderation in discretionary cash flow on an annual basis, to 4.4 percent from 5.3 percent prior to considering the savings rate, and to 4.6 percent from 5.1 percent after contemplating the savings rate [...] but within that forecast expect a drag on consumer spending from 'essential spending' — energy, food, and healthcare — beginning in 3Q2016, for the first time since 3Q2014," Fassler elaborated.
"While consumers — and retailers — are likely to benefit from higher wage growth, retailers selling into middle- and upper income consumers but levered to minimum wage increases are likely to face margin pressure over time," Fassler noted.
The analyst highlighted that the summer is a tough season for retail stocks.
4. E-Commerce Pressure Finally, continued pressure from e-commerce (read: the likes of Amazon.com,AMZN) is weighing on margins of retailers."Retail stocks have already sputtered of late, driven by tougher April trends from several firms reporting sales in recent days, and relative multiples for several sectors, including apparel brands, hardlines, and specialty, are below their long-run averages, but the aforementioned issues likely still need to play out, in our view," Fassler added.
Retail Names Galore
Softer Dollar, Less Volatility Exposure Under this scenario, Goldman favor firms aided by a softer dollar, but less exposed to volatility in the 10-year. Key stocks include:- Aramark ARMK
- Deckers Outdoor Corp DECK
- Cedar Fair, L.P. FUN
- Kraft Heinz Co KHC
- Mattel, Inc. MAT
- VF Corp VFC
- American Eagle Outfitters AEO
- Abercrombie & Fitch Co. ANF
- Express, Inc. EXPR
- Foot Locker, Inc. FL
- J C Penney Company Inc JCP
- Diamond Resorts International Inc DRII
- Cedar Fair
- Vail Resorts, Inc. MTN
- Royal Caribbean Cruises Ltd RCL
- Wyndham Worldwide Corporation WYN
- Advance Auto Parts, Inc. AAP
- Burlington Stores Inc BURL
- Carter's, Inc. CRI
- Dollar General Corp. DG
- Dollar Tree, Inc. DLTR
- Hanesbrands Inc. HBI
- Penn National Gaming, Inc PENN
- Sally Beauty Holdings, Inc. SBH
- TJX Companies Inc TJX
- Buffalo Wild Wings BWLD
- Kraft Heinz Co
- CarMax, Inc KMX
- Monster Beverage Corporation MNST
- Nike Inc NKE
- Starbucks Corporation SBUX
- Sportsman's Warehouse Holdings Inc SPWH
- Wayfair Inc W
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