Home Consumer debt Retail stocks are priced for a recession. The market may be too negative.

Retail stocks are priced for a recession. The market may be too negative.


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Despite concerns about inflation, retailers reported a strong fourth quarter.

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Concerns about inflation and the potential for an economic slowdown have weighed on retailers this year. Yet JP Morgan says for many stocks, the bad news is already priced in.


SPDR S&P Retail

the exchange-traded fund (ticker: XRT) is down more than 21% this year. Although retailers generally had a fairly strong fourth quarter and many provided upbeat commentary on the year ahead, investors were nervous for a number of factors. Inflation is reducing the purchasing power of customers at a time when people are more inclined to spend on services – such as restaurants and holidays – than on the goods they have stored away during the lockout.

Still, the market may be too low for the group, argues JP Morgan’s Matthew Boss. He writes that while the headlines are concerning, there is reason to be optimistic that consumer spending will not slow dramatically. Not only is unemployment at its lowest in nearly two decades, but wages have risen, if not as fast as inflation. In addition, the household debt service ratio is at its lowest in 40 years and household savings rates are above average.

Of course, the possibility of a recession remains a concern for the group, but again Boss argues that stocks have oversold, given that a “recession [is] more than price in the sector today.

Using a 2001 baseline for same-store sales and margins, he estimates that if retailers were to operate as they have during this downturn, that would equate to earnings per share of $4.94 for the group, about 3% above the $4.79 EPS they currently appear to price in, based on price-earnings ratios.

Overall, he estimates that more than 60% of the retailers he covers are already pricing in a recession similar to 2001. This means that the earnings share of the price-earnings ratio may still increase, even with the economic conditions. headwinds. Additionally, many companies have structurally improved their businesses since the pandemic, another catalyst for expanding their multiples.

With respect to specific companies, the use of its 2001 era model shows that

American Eagle Outfitters

(AEO) and

Victoria’s Secret & Co

(VSCO) was perhaps the most oversold, with

Ross Stores

(ROST), and

Bath and body care

(BBWI). In contrast, he notes that Gap (GPS) and Dillard (DDS) present the highest downside risk to stocks in his recession scenario.

Write to Teresa Rivas at [email protected]