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 Pricing power will likely pick the winners, analysts say.
Several signs point to solid performance by the group as it heads
into its strongest sales season. Consumers have cash to spend as
wages rise, October posted the best print on monthly jobs creation
this year, and gasoline prices remain low right before the start of
the holiday shopping season.
"The consumer should be feeling pretty good heading into the last
couple of the months of the year," said Sean Lynch, co-head of
global equity strategy at Wells Fargo Investment Institute in Omaha.
"We think we could be set up for a little bit of a (stock market)
rally here into year-end."
Excluding Amazon <AMZN.O>, which has been one of the top-performing
stocks all year, consumer names have been mostly absent from the
market's rally off its late August low. Technology <.SPLRCT> and
energy <.SPNY> have added the most to the S&P 500 since then, though
consumer stocks <.SPLRCD> continue to be the best-performing sector
year-to-date, with a near 13 percent gain.
Retail <.SPXRT> has been particularly strong, up 27 percent this
year, and the expectation of an increase in retail sales could push
the S&P 500 toward its record high, set in May.
The latest tech-led leg up in stocks "has been criticized for how
narrow it’s been," said Steve Chiavarone, portfolio manager at
Federated Investors in New York.
The rally "now has the ability to spread out and we can see some
further strength in consumer discretionary," he said, while also
citing financials as an added push higher for stocks.
The suggestion of higher prices in consumer stocks is evident in the
options market. Bets tied to a rise in the shares of the consumer
discretionary sector ETF <XLY.P> now outnumber bearish ones by a
2.5-to-1 margin, about the highest this year.
BIG NAMES, BIG DATA OUT NEXT WEEK
Retail sales for October, due on Friday the 13th, are expected to
show a 0.3 percent month-on-month increase after a 0.1 percent gain
in September.
Earnings reports throughout the coming week include major retailers
like Macy's <M.N>, Kohl's <KSS.N>, Nordstrom <JWN.N> and J.C. Penney
<JCP.N>, some of the roughly 40 U.S. consumer-oriented companies due
to report.
October's strong jobs data, reported on Friday, is mostly seen as
beneficial for retailers, as workers with bigger paychecks are more
willing to open their wallets.
"Lower gas prices continue to add to the wallet and the consumer's
level of confidence," said Art Hogan, chief market strategist at
Wunderlich Securities in New York.
"The over-arching trend here is you have to be in the right place,"
he said. "Teen retailers are having a harder time, they seem to be
losing out to the fast casual names like Forever 21 or H&M." Forever
21 is privately traded and Swedish company H&M <HMb.ST> is traded on
the Stockholm exchange.
[to top of second column] |
But while greater consumer spending power is expected largely to be
a boon to retailers, it may take a bite out of some.
With the October rise in wages, which have been almost stagnant
despite a tightening labor market, average hourly earnings are up
2.5 percent year-on-year - the biggest increase since July 2009.
That confirmed data last week that showed U.S. labor costs
accelerated in the third quarter as the jobs market continued to
tighten.
Pressure from higher wages is likely to show up in some retailers'
guidance next week as it did last month when Wal-Mart <WMT.N> warned
that higher wages would play a large role in cutting earnings per
share as much as 12 percent next fiscal year.
Retail is one economic sector that got used to very inexpensive
labor in the past few years, and rising wage inflation pressure is
likely to hurt margins.
"Over the next quarter or two we could start to see higher labor
costs really eat into profits for some of these retailers," said
Jared Woodard, senior equity derivatives strategist at BGC Partners
in New York.
"The biggest vulnerabilities are in stores that aren't selling high
margin goods like discount apparel, T.J. Maxx, Ross Stores and
others that really depend on volume and need high head count to get
the job done," he said.
T.J. Maxx parent TJX Companies <TJX.N> and Ross Stores <ROST.O> rank
among the lowest in revenue per employee among retailers according
to Thomson Reuters data, with near $150,000 and $160,000
respectively for the last 12 months.
Of those reporting next week, J.C. Penney <JCP.N> has less than both
at $110,000 and Macy's <M.N > is just shy of $170,000, while
Nordstrom <JWN.N> is not far with about $210,000. Kohl's <KSS.N>
more than doubles that figure at almost $600,000.
By comparison, Amazon sold just above $650,000 per employee in the
last year.
(Reporting by Rodrigo Campos; Additional reporting by Chuck
Mikolajczak and Saqib Iqbal Ahmed; Editing by Linda Stern and Leslie
Adler)
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