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June 28, 2023 at 11:00 AM EDT
Expectations for a revival in retail stocks are dimming as Wall Street analysts warn of a trio of challenges: shoplifters, recession-wary spenders and students saddled with the return of debt payments.
Investors are running out of reasons to bet on retail shares after a lackluster start to the year. Inflation remains sticky in the face of the Federal Reserve’s most aggressive monetary tightening in a generation, leaving Americans to wrestle with higher borrowing costs and the risk of a recession — just as student loan payments return in the second half of 2023.
That, and an uptick in shoplifting, has John Zolidis, founder of consumer-focused investment adviser Quo Vadis Capital, bracing for choppy performance in retail stocks over the coming months.
“It’s a lot easier to see the bearish scenario coming to pass,” he said. “The consumer has been stronger than expected so far, so it could continue, but the environment’s working against that outcome.”
A key gauge of consumer equities is up 11% in June after four straight months of declines. Still, it’s lagged the broader S&P 500 Index so far this year, up just 4.1% compared to a 14% advance in the benchmark. That follows a 33% drop in retail shares last year, the worst annual performance since the 2008 financial crisis, as consumers shifted spending to necessities amid a soaring rate of inflation.
Fed Chair Jerome Powell and his colleagues vow to keep pushing up interest rates, if needed, to combat consumer price increases, adding pressure on Americans who’ve borrowed to buy homes or cars. That’s caused shoppers to keep their discretionary spending in check — at least according to bellwether retailers Walmart Inc. and Target Corp.
A similar trend emerged in the latest Conference Board survey. While US consumer confidence increased to the highest level since early 2022, Americans also indicated they may pull back on major purchases.
At the same time, analysts are honing in on even more risks that threaten to hit retailers in the second half. Americans are poised to once again reckon with some $1.8 trillion in federal education debt as payments will be due starting in October. President Joe Biden’s student debt forgiveness plan, meantime, is expected to be ruled on by the Supreme Court any day, adding uncertainty.
Core retail sales growth stands to take a 1% to 2% hit from the resumption of student loan payments after a three-year pause, according to JPMorgan Chase & Co. analysts led by Christopher Horvers. They still expect an impact of about half that if the US’s top judges allow some forgiveness, the analysts wrote in a note earlier this month.
“Even if forgiveness goes into effect, the resumption of the other loan payments is still a net-headwind for the consumer,” KeyBanc Capital Markets Inc. analyst Bradley Thomas wrote in a June 19 note to clients. He sees the return of student-loan payments elevating risk for nearly all discretionary retailers into the crucial holiday shopping season.
So-called shrink — industry jargon for inventory losses often tied to theft — is also causing concern on Wall Street after being mentioned more on retailers’ earnings calls in the second quarter than any quarter on record, according to transcript data compiled by Bloomberg. Executives at Target and Ulta Beauty Inc., among others, have recently called out stealing, and organized retail theft in particular, as an increasing challenge.
Bernstein analysts led by Aneesha Sherman have ramped up their expectations for losses tied to shrink since March. They forecast a more than $40 billion incremental hit to US retailers’ profits this year after they estimate shrink erased about $120 billion in profits in 2022.
“It’s a huge problem for retail,” Telsey Advisory Group analyst Joseph Feldman said, explaining that shoplifting can create rippling losses tied to the item’s cost, missed sales and restocking problems.
