What happened

Shares of arts and crafts retailer The Michaels Companies (NASDAQ:MIK) shot up 27% in May, according to data from S&P Global Market Intelligence. Teen clothing store American Eagle Outfitters (NYSE:AEO) advanced 15%, while off-price retailer Burlington Stores (NYSE:BURL) gained 15% and office supply seller Office Depot (NASDAQ:ODP) came in with a price advance of 11%.

The S&P 500 index was only up around 4.5%, so each of these stocks handily outperformed the average here. 

However, when you step back and look at the first five months of 2020, there's a bit of a difference. For example, the S&P 500 was off by about 5% over that span. Office Depot and Burlington were both down just under 10%, and American Eagle and Michaels were lower by 37% and 52%, respectively. There's some worthwhile information hidden in these two sets of numbers.

A couple looking into shopping bags they're carrying while shopping in a mall.

Image source: Getty Images.

So what?

The news was generally pretty good when Office Depot reported earnings on May 6. The company helped business customers shift to a work-from-home environment in the face of efforts to contain the spread of COVID-19. Although total sales were down 2% in the quarter, same-store sales were higher by 2% and there was a "significant increase" in online demand.

It makes sense that the company is doing relatively well through this difficult period and that investors have taken a much more positive view of this stock compared to those of other retailers. Thus, there was no particular reason to expect outsized gains relative to other stores in May, even after the company reported solid earnings. It was simply living up to investor expectations. 

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Burlington's stock performance through the first five months of 2020 was more about its business model. Off-price retailers have generally been outperforming more traditional retailers in recent years. And while the company's first-quarter financial results were dismal, with sales down by 50% year over year, investors are likely expecting solid performance as COVID-19 restrictions start to soften. That will allow the company to reopen its stores and customers to return to seeking out bargains among its clothing racks.

Interestingly, if the efforts to slow the spread of COVID-19 do push the U.S. economy into a recession, which currently seems likely, Burlington's off-price model will likely give it a leg up on full-price competitors. The gain in May was basically ambivalent, if you will, because the company has had a difficult past but expects a better future, all underpinned by a business model investors think is attractive today. 

American Eagle and Michaels are on opposite ends of the spectrum. American Eagle, which sells fashion to teens, operates a lot of mall-based stores. This was an already stressed business model, as shoppers now increasingly use the internet to buy clothes. Moreover, reopening inside of a mall is a more complex process than reopening a freestanding building, since the mall is a place where people congregate in groups -- and COVID-19 seems to spread most easily in group settings.

Investors took a very dim view of the stock during the height of the coronavirus-related market sell-off. The May advance was based on the fact that there are positive signs taking shape, including both reopening plans and news about a potential vaccine for COVID-19. However, investors weren't quite willing to give the company the all-clear, as the performance through the first five months of 2020 clearly demonstrates.

Indeed, even after things go back to some semblance of normalcy, American Eagle still has some headwinds to navigate. That said, in early June American Eagle noted that it has seen sales return to near-normal levels at stores it has been able to reopen. And while first-quarter earnings were pretty rough, which isn't a shock, the positive reopening news is an extremely encouraging sign for the future. 

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Michaels, meanwhile, reported fourth-quarter 2019 earnings in mid-March, before the impact of the efforts to slow the spread of the coronavirus had taken full effect. But with its stores shut, investors pushed the stock down sharply in anticipation of the hit that second-quarter results would take.

The problem is that Michaels was struggling even before COVID-19. In the final quarter of 2019, sales fell 3.7%, with full-year 2019 sales down 3.8%. Adjusted earnings in the fourth quarter were off by 12.5%, with the full year lower by 10.2%. That was not a great backdrop as the arts and crafts retailer entered the COVID-19 crisis.

Investors pushed the stock sharply lower. But as more positive news emerged about reopening the economy, they shifted to a risk-on-investment approach. Thus, heavily sold names like Michaels started to attract more attention. With a lot more ground to make up, the stock rallied more than other retailers did. However, as the five-month span shows, investors are still not quite convinced that the company is out of the woods just yet.

For reference, first-quarter earnings, released on June 4, were pretty bad, with comparable-store sales down nearly 28% and earnings dropping to a loss of $0.43 per share from a profit of $0.31 in the first quarter of 2019. That said, management expects to have almost all of its stores open again by the end of June, which will be a big positive for third- and fourth-quarter results. 

Now what?

Wall Street often paints with a broad brush. The gains in various retail segments in May were built on a notable shift in trends, with plans for reopening the U.S. economy starting to take shape. That's definitely good news for the retail sector -- but when you step back and look at the bigger picture, you can see that not every retailer is the same, and long-term investors shouldn't treat them as if they were. Now is a time to be selective in the retail sector, especially since there's a risk that the U.S. economy will fall into a recession as a consequence of the efforts to contain the coronavirus.