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Why These 3 Retail Stocks Rallied Today

By Steve Symington - Updated Apr 15, 2019 at 1:21PM

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J.C. Penney, Gap, and Target all popped as the market's attention shifted to this week's U.S.-China trade talks. Here's what you need to know.

What happened

Shares of retail stocks as soared on Monday, amid hopes that resumed trade talks between the U.S. and China could ease tensions between the two nations and potentially quash concerns over slowing global economic growth. According to Bloomberg this afternoon, Chinese Vice Premier and lead economic advisor Liu He unexpectedly attended the talks today, despite earlier reports that lower-ranking officials from China's Ministry of Commerce would set the tone.

Retailers also benefited from a new report from the Institute for Supply Management, showing that the U.S. services sector -- where the majority of Americans work -- continued to expand at a healthy, albeit slowing, pace, despite persistent worries over the fallout of the U.S.-China trade war.

The gains in retail were broad-based, leaving the SPDR S&P Retail ETF (XRT 1.69%) up more than 3% today. But several prominent names led the charge; J.C. Penney (JCPN.Q) popped 16.4%, Target (TGT 1.70%) climbed 4.9%, and Gap (GPS 2.50%) jumped 4.6%.

Woman going up an escalator holding colorful shopping bags


So what

It might seem counterintuitive that stateside retailers could suffer from the 10% tariffs implemented on hundreds of billions of dollars in products imported from China -- a figure that was set to increase to 25% at the start of 2019 before President Trump agreed to delay the move as the two countries continue to negotiate.

But Gap CEO Art Peck, for one, has repeatedly warned that even as companies shift manufacturing away from China, in many cases tariffs are still unavoidable and will ultimately amount to a "tax on the consumer."

Target CEO Brian Cornell has also been forthright with his position on the matter, stating during the company's second-quarter earnings call last year:

As a guest-focused retailer, we're concerned about tariffs because they would increase prices on everyday products for American families. In addition, a prolonged deterioration [in] global trade relationships could damage economic growth and vitality in the United States. [...] Given these risks, we have been expressing our concerns to our leaders in Washington, both on our own and along with other retailers and trade association partners. However, our concern is centered on the impact of tariffs, on consumers, and the economy, not our ability to manage our business in the [face] of these challenges.

Shares of Target subsequently plunged in late November, after the company's third-quarter 2018 earnings fell below expectations.

Meanwhile, J.C. Penney has struggled more than most of late, leaving investors to endure several wild swings in recent weeks as the department-store chain strives to return to sustained, profitable growth.

In a September letter to U.S. Trade Representative Robert Lighthizer, J.C. Penney Counsel David Spooner wrote: "No retailer will be able to simply absorb the cost of a 10% tariff, much less a 25% tariff, in today's ultracompetitive retail environment. That means consumers will pay higher prices."

Now what

Of course, there are no guarantees that the U.S. and China will be able to come to terms. But the presence of high-ranking Chinese officials appears to signal that the Middle Kingdom is placing this week's talks at the top of its list of priorities.

Nonetheless, with retail stocks moving hard despite a lack of concrete news to that end, I suspect investors will be in for much more volatility in the coming days.

Check out the latest J.C. Penney, Target, and Gap earnings call transcripts.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Gap, Inc. Stock Quote
The Gap, Inc.
$10.64 (2.50%) $0.26
Target Corporation Stock Quote
Target Corporation
$172.48 (1.70%) $2.88
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
SPDR Series Trust - SPDR S&P Retail ETF Stock Quote
SPDR Series Trust - SPDR S&P Retail ETF
$71.42 (1.69%) $1.19

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