Retailers’ stocks have spit the bit this year as soaring inflation and interest rates have sparked concern about consumers’ buying power.
The S&P Retail Select Industry Index has dropped 27% year to date. But Wells Fargo analysts see opportunities among defensive plays.
“In the wake of a decidedly mixed first-quarter-earnings season, it's clear that hard-line retail categories are feeling the pinch across multiple fronts,” they wrote in a commentary.
Macro Uncertainty, Inflation
That includes “rising macro uncertainty and a sharply inflationary backdrop,” they said. It also includes “signs that bigger ticket, discretionary goods may finally be falling out of favor after two-plus years of outsized pandemic-fueled growth.”
Wells Fargo surveyed about 1,000 consumers to get their views on spending. The key question: Is the consumer slowing, or are spending patterns simply normalizing?
“Survey results suggest both, with nearly every hardline category showing signs of vulnerability versus our February 2022 survey,” the analysts said.
“With this in mind, playing defensive still makes the most sense, with staples-like categories, top-tier execution and limited margin fallout top of mind.”
As for the survey results...
· The amount of respondents increasing their spending at hard-line retailers slid to 83% from 94% in the February survey.
· A total of 78% of respondents have either cut back or plan to cut back on hard-line spending in response to inflation, a 4-percentage-point increase from February. “Discretionary categories like furnishings (Wayfair (W), Bed Bath & Beyond (BBBY)), electronics (Best Buy (BBY)) and hobbies (Joann (JOAN) ) are the most vulnerable,” the analysts said.
· “While inflation tends to most negatively impact the lower-income consumer (National Vision (EYE), AutoZone (AZO), O’Reilly Automotive (ORLY)), our data suggests nearly all consumer income brackets are cutting back (RH (RH), Williams-Sonoma (WSM), Floor & Décor FND).”
· A total of 29% of consumers are making more money. Among them, 57% still cite lower/unchanged spending power. “Balance sheet health is also moderating, with 32% of consumers reporting lower savings rates versus last year, and 35% reporting higher credit card balances.”
· A total of “50% of homeowners are delaying a major home improvement project due to rising rates and/or inflationary pressures, a notable pivot versus February,” the analysts said. “That said, the existing backlog of home improvement projects still appears quite large (Home Depot (HD), Lowe’s (LOW), Floor & Décor).”
· The wallet share for experiences is recovering, while demand for durables is moderating.
The analysts said their “best ideas today” include Home Depot, AutoZone and Tractor Supply (TSCO).
They recommend avoiding Bed, Bath & Beyond, Wayfair and Joann.
