Investors are taking a closer look at the market’s consumer discretionary companies as a reopening U.S. economy fuels hopes of a turnaround for some of the sector’s hardest-hit names.
Many companies in the sector have been battered by the countrywide coronavirus-fuelled lockdowns that have weighed on growth and damaged retail spending over the past several months, although the stocks of a few, such as Amazon.com Inc., have soared.
A gradual lifting of lockdowns in some states has stirred hopes for a bounce back for the retailers that make up much of the sector.
Some investors, however, say it may be months before consumers return to their previous shopping habits, making it unlikely that the companies will see a pickup in revenues in the near term.
Firms ranging from middle-income retailers such as Gap Inc. and American Eagle Outfitters Inc. to high-end destinations such as Tiffany & Co. and Vail Resorts Inc. are expected to report results in the week ahead.
“This particular group is full of landmines,” said Jamie Cox, managing partner for Harris Financial Group. “There is not going to be a lot of investor follow-through until we get some certainty with what future revenue prospects are going to be.”
Shares of the Gap, for instance, are down 43 per cent for the year to date. A recession that persists through the fourth quarter of this year would reduce the company’s revenue by 40 per cent, according to a note by research firm Trefis.
Next Friday’s U.S. jobs report is expected to show that the unemployment rate rose to 19.8 per cent in May, smashing April’s record 14.7 per cent, according to a Reuters poll. Non-farm payrolls are expected to drop by 7.4 million, adding to the 20.5 million jobs lost the previous month.
Mr. Cox is focusing on dominant players such as Amazon, Walmart Inc. and Target Corp., which have a mix of essential items such as groceries, as well as electronics and games that can appeal to customers who may face extended lockdowns during a potential second wave of the virus.
Over all, retail companies in the S&P 500 are up 12.9 per cent for the year to date, a gain powered largely by Amazon’s 31-per-cent rally. Apparel companies, by comparison, are down 16.2 per cent over the same time.
Brian Jacobsen, senior investment strategist for the Wells Fargo Asset Management Multi-Asset Solutions team, says retail companies will likely show rising expenses over the next several quarters because of things such as more frequent sanitation of stores and technology purchases aimed at increasing the productivity of employees working from home.
“It’s really going to be a challenge to get a clear read of the direction for quite a while,” he said.
Despite those headwinds, investors may still gravitate toward companies that are able either to tap the capital markets for funds or draw from their financial reserves, said Randy Frederick, vice-president of trading and derivatives with the Schwab Center for Financial Research.
Retailers such as J. Crew Group Inc. and J.C. Penney Co. Inc. have already filed for bankruptcy owing in part to the novel coronavirus pandemic, leaving more opportunity for companies that are able to survive and grab market share, Mr. Frederick said.
“You’re getting set up for potential upside surprises,” he said. “You may take a step back and look at this and say, ‘No matter how awful these numbers may be, at least they’re still in business.’”
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