It has been a tough couple of years for retail stocks. Last year, the SPDR S&P Retail ETF fell by 33% as rising interest rates weighed on the markets. And this year hasn't shown any improvement, with the index's value being relatively unchanged from where it started 2023. It may be tempting to think that retail stocks may be bottoming out and that the new year could be better for them. But that could be a mistake. Here's why they're likely to struggle in 2024 as well.
Consumers are planning to spend less
According to data from online review website Trustpilot, consumers are planning to scale back their spending this year when compared to 2022. Data from a recent survey found that, on average, 39% of Americans who spent money last holiday season are going to spend less money this year. Rising costs are a big part of the reason, as inflation is putting pressure on consumers.
To make matters worse, student loan repayments resume this month, which can put added pressure on consumers, forcing them to stretch their budgets even more. Although some spending, such as groceries, is essential, companies that rely on discretionary spending, including Target (TGT 0.18%) and Home Depot, could feel the worst of these effects.
And it's the holiday shopping season that can make or break a retailer's year. But investors won't learn of those results until the early part of 2024, which is when retail stocks could face some added pressure.
Companies are also scaling back hiring
Retailers are already bracing for a slowdown this year, and that's evident in their hiring numbers. According to Reuters and a report from Challenger, Gray & Christmas, retailers in the U.S. are planning to hire the lowest number of workers for the coming holiday season since 2008. This is partly due to weak consumer confidence, but also due to rising labor costs.
Last year there were 519,400 jobs added in the last quarter of 2022. This time around, analysts project that just 410,000 seasonal jobs will be added for 2023's holiday season.
Shrink remains a problem
Another problem that can also hurt earnings reports for retailers this year is shrink. Last month Target announced it would be closing nine stores in major cities due to concerns relating to theft and violence. While that's a relatively small number given the company has about 2,000 locations in the country, it underscores the problems retailers have been dealing with this year. Nike also recently closed its flagship Portland location as it faced similar challenges.
Home Depot has been battling these problems as well, and it has resorted to locking up many of its items, even lower-priced products that are $50. CEO Ted Decker calls it "a big problem for retail."
Many retailers have blamed their poor results on shrink-related problems this year, and with inflation still being problematic and consumers feeling the pressure to buy gifts during the holiday season, it's a problem that could very well continue toward the tail end of the year. Target recently downgraded its guidance for the year as a result of "near-term challenges," now projecting its earnings per share to be between $7 and $8, which is down from an earlier guidance of $7.75 and $8.75.
Between a drop in spending and an increase in shrink, the quarterly results that come out early in 2024 could be incredibly underwhelming for retailers.
What should investors do?
Now is a tough time to be investing in retail stocks. Shares of Target are down 28% this year, while Home Depot stock has declined by 5%. Walmart, which has a strong grocery business, has been more resilient, rising by 13% in value.
If you're prepared to hang on for multiple years and ride out the current economic headwinds, it may be worth considering loading up on some strong businesses at good prices that are facing challenges. Target, trading at 15 times earnings, may be a good contrarian investment to pick up. Home Depot, at a multiple of 19, also isn't too expensive -- its valuation is in line with that of the S&P 500 average. Walmart, meanwhile, with its more diversified and more stable business model, trades at a heftier 30 times profits and may be a bit too expensive.
But the key is being patient. These stocks could struggle into at least the early part of next year, and even then there is no guarantee things will be better. In the long run, economic conditions should improve, and so should the performances of these companies. As long as you're going with strong, established brands and businesses such as Home Depot, Target, or other retailers, you can put yourself in a good position to benefit from an economic recovery in the future.
