As second quarter 2022 earnings season wraps up, this week has proven to be an important one for the Retail sector. First, investors got the chance to hear from some of the top retailers such as Walmart (WMT), Target (TGT), Home Depot (HD) and Lowe’s (LOW). Next, US national retail sales for July were released.

The data points to a confusing environment where some segments of the US consumer are under pressure, but others are holding up surprisingly well despite a slowing economy. While elements of a “K” shaped economy are evident, with high end consumers still spending strongly and low-end consumers pulling back, overall expenditures have been better than Wall Street feared. For July, Retail Spending ex Automobile sales and gasoline rose +0.7% versus expectations of +0.4%.

Overall, though, inflation has been a headwind for the US consumer in 2022. This has caused many people to feel squeezed as overall wage growth has lagged inflation despite a tight labor market. As seen on the chart below, this has resulted in a sharp drop in Consumer Confidence.

Chart 1: CB Consumer Confidence Index

William O’Neil + Co.

One of the effects of this drop in consumer confidence is that low wage earners have been forced to concentrate their spending on essentials as well as trade down in terms of price points. WMT, a good proxy for overall consumer spending, noted this in its most recent quarter reported this week stating that consumers felt squeezed and were purchasing less higher profit discretionary items and instead focusing on basics. For example, households earning under $100,000 a year appeared to drive double-digit growth in WMT’s food categories. As a result, the company reported sales growth of over 8% in the quarter. This might have been aided by the recent move of Oil prices back below the $90 per barrel level. All of this led WMT to forecast +3% same store sales growth in the back half of the year. While WMT’s technicals have improved in the short term, we believe that WMT will continue to underperform versus the S&P 500.

William O’Neil + Co.

In its most recent quarter, Target reported weaker than expected results. They noted that margins were impacted because of aggressive adjustments to reduce inventory levels, lower than expected sales in discretionary categories, and higher shipping costs. Both Target’s CEO and CFO are hopeful that they are past the excessive inventory issues and are hopeful for the rest of the year. On the other hand, we remain cautious on Target’s stock and believe that it should be avoided. TGT’s price action looks weak, shows a lot of heavy selling, and should continue to lag the market for the rest of the year.

William O’Neil + Co.

Most retail sector stocks have been mixed this year, with many stocks experiencing significant technical damage. As a result, most retail stocks will not form classic William O’Neil bases for three to six months. Despite this, we believe that there are some pockets of strength that are actionable and have strong fundamentals. Specifically, there are three areas we would encourage investors to focus on given the uncertainty of the US economy.

Given the previously mentioned squeeze on the pocketbooks of the bottom half of Americans, we continue to favor US Retail Discounters. If the US economy was to enter a …….

Source: https://www.forbes.com/sites/randywatts/2022/08/18/interesting-ideas-in-retail-stocks/