DJ Retail Stocks Are All Over the Place Now. How to Choose Carefully. -- Barrons.com

Oct 16, 2021

By Al Root 

After surging to start the year, retail stocks have gotten messier. It's time for investors to pay more attention to individual retailers.

Things started out great in 2021, with the SPDR S&P Retail ETF (ticker: XRT) gaining 47% through Labor Day. But the ETF is down about 2% over the past three months, even as both the S&P 500 and Dow Jones Industrial Average have managed small gains over that span.

The performance of the stocks in the retail ETF has been anything but uniform. One of the best-performing over the past three months is department store Macy's (M), up about 36% over that span. One of the worst is rival Nordstrom (JWN), down about 16%. Typically rock-solid Burlington Stores (BURL) has fallen about 18%. (Burlington stock has returned 28% a year on average over the past five years.)

With performance like that, investors in the sector need to be a little more cautious, especially with supply-chain problems threatening holiday shopping and pandemic patterns continuing to affect consumer buying habits.

"I don't think people really know what to do right now," Gordon Haskett analyst Chuck Grom tells Barron's. "There's a ton of confusion out there."

Investors started out believing that Covid impacts would fade by now, Grom notes. That was before the Delta variant kept workers at home. Then came supply-chain issues. "I've never covered retail where the concern...is too [little] inventory," he says.

Supply-chain problems are worse for discounters, such as T.J. Maxx operator TJX (TJX), Ross Stores (ROST), and Burlington, which rely, in part, on other chains overordering. All three stocks have underperformed the market and peers recently. On Thursday, Loop Capital's Laura Champine downgraded the trio to Hold from Buy.

Nevertheless, the U.S. consumer is in great shape. Personal savings are at about $1.9 trillion, down from pandemic-induced highs but higher than normal. And that doesn't include wealth gains from a roaring stock market and a rising housing market.

Grom recommends a barbell approach for the coming year. For starters, that means sticking with quality stocks and companies that benefit from Covid work/life changes. "The longer the pandemic has gone on, the greater people's habits have become habitual, if you will," he says.

People will keep investing in their homes, for instance. Three stocks Grom rates Buy are Home Depot (HD), Lowe's (LOW), and Tractor Supply (TSCO). He also likes Target (TGT), another stock with strong operational momentum. It's seeing growth in online grocery ordering, which Grom believes consumers will continue doing after Covid.

With the barbell, there is also room for stocks that make investors a little more nervous, such as Macy's and Kohl's (KSS). "Those are valuation calls," says Grom.

Macy's and Kohl's trade at about seven and eight times estimated 2022 earnings, respectively. The S&P 500 trades at about 20 times 2022 earnings, while retail stocks in the index trade at closer to 28 times.

"Both are learning to do less with more," says Grom. The old inventory-management mentality was "Stack 'em high and let 'em fly." Now companies such as Macy's are doing the reverse -- working with lower inventories and focusing on making money on what's in the store.

That looks like a solid strategy for any retailer in the long run.

Write to Al Root at allen.root@dowjones.com