Searching for Value in the Retail Sector

Editor’s Note: As anyone who knows me well could tell you, I don’t like shopping. It’s not that I don’t like buying things, even though I’m at a point in my life where I don’t need much.

My problem with shopping is the stores themselves. I find most of them to be dimly lit with overstuffed shelves perused by harried shoppers pushing squeaky carts.

Fortunately for me, my wife likes to shop and is very good at it, so we’ve worked out a deal. She gets to spend as much on herself as I do on my round of golf. That’s not a great formula for saving money, but everyone comes home happy!

Losing the Trade War

I can tell you who’s not happy these days, big box retailers. After struggling to survive while the coronavirus pandemic disrupted global supply chains a few years ago, they now have a new problem on their hands.

Namely, the potential impact of new trade tariffs enacted by the Trump administration against Canada, Mexico, and China. Approximately 43 percent of all imports into the USA come from those three countries.

No matter what anyone says to the contrary, the fact of the matter is that the cost of the new tariffs will be borne mostly by American consumers. That’s not a political statement, just an unbiased recognition of economic reality.

Consumer (lack of) Confidence Survey

Lately, consumers have been feeling nervous about the economy. According to The Conference Board, its Present Situation Index fell by 2.4 percent in February. It measures “consumers’ assessment of current business and labor market conditions.”

At the same time, its Expectations Index fell more than 11 percent. It measures “consumers’ short-term outlook for income, business, and labor market conditions.”

In other words, American consumers are not feeling good about how things are, and even worse about how they things to be soon. That can be a problem if enough people decide to spend less now to have more money later.

Retailer Index

For proof of that, consider the performance of the SPDR S&P Retail ETF (NYSE: XRT). It’s stated objective is to “proved investments results that, before fees and expenses, correspond generally to the total return performance of the S&P Retail Select Industry Index.”

That index is comprised of retail stocks in the retail apparel, automotive, computer and electronics, food and drugs, and other specialty retailers. Its top three holdings are grocer Albertsons (NYSE: ACI), pet supplier Chewy (NYSE: CHWY), and apparel manufacturer Urban Outfitters (NSDQ: URBN).

Also listed among this fund’s top ten holdings are major big-box retailers Nordstrom (NYSE: JWN), Kroger (NYSE: KR), and Costco (NSDQ: COST). In short, this fund accurately reflects Wall Street’s interest the level of retail consumer activity in the United States.

Four Year Slump

Recently, Wall Street hasn’t had much interest in big-box retailers. At the start of this week, XRT traded below $73 for the first time since last September.

Even worse, it has been mired in a slump since peaking above $100 in November 2021. Over the same period, the SPDR S&P 500 ETF Trust (NYSE: SPY) has gained 25 percent while XRT has fallen by a similar amount.

While Wall Street was pumping money into tech stocks, it was pulling it from retailers at the same time. Scalability is the elixir that has pushed tech stocks to record highs, and the lack of it is the reason big-box retailers are going nowhere.

Good Things Come in Threes

There is a trade opportunity among all that retail carnage. If the Trump administration withdraws the tariffs before they can do much damage to the economy, then retail stocks could surge. The big question is, what will it take for Wall Street to start buying them again?

First, a cessation of the next round of trade tariffs would remove the most immediate threat to retailers. The last thing they need is to jack up prices by 10 percent or more while consumers are feeling pessimistic about the economy.

Second, lower interest rates would make the cost of buying on credit cheaper. According to CapitalOne Shopping Research, “63% of nationwide retail sales dollars are from credit card transactions.”

Third, consumers need to feel more confident about the direction of the overall economy. Unlike me, there are lots of shoppers in this country that would like nothing more than to hit the stores with a full wallet on a Saturday afternoon!