The retail stock rout may only just be starting
Fundamentals in the retail sector continue to erode, according to Wells Fargo, suggesting the ongoing consumer spending slowdown may not yet be priced into related stocks.
"We remain downbeat on the near-term fundamental prospects in our space," Wells Fargo retail analyst Ike Boruchow wrote in a note to clients. "On top of that, our recent channel work suggests the space continues to soften: 1) foot traffic trends slowing further to end June and; 2) a promotional cadence that continues to worsen (especially in the mid-tier apparel space)."
Boruchow added that investors should be highly selective right now with retail stocks, with the analyst's top picks being accessories sellers Capri Holdings and Tapestry in addition home scent king Bath & Body Works.
Retail has been hammered in recent weeks.
Discounter Target kicked off the concerns on the sector's health with a shocking decision to liquidate massive amounts of slow-moving inventory (notably in home goods) and take a subsequent more cautious view on near-term profits.
Since then, retailers such as RH, Bed Bath & Beyond and Kohl's issued financial warnings for the second quarter. Bed Bath & Beyond's outlook was so dire that it prompted one analyst to tell Yahoo Finance Live the company may go out of business.
Nike took a more measured approach to its full-year financial outlook when it reported quarterly earnings.
Overall, retail stocks — as measured by the SPDR S&P Retail ETF — have tanked 34% year-to-date, compared to a 19% decline for the S&P 500. Shares of the aforementioned Target have fallen faster, notching a 37% decline.
The drumbeat of warnings and poor stock prices come against the backdrop of signs the U.S. shopper is buckling under the weight of a bear market in stocks and sky high prices for everything from gas to groceries.
U.S. consumer confidence is at a 16-month low, according to a recent reading from the Conference Board. Consumer spending adjusted for inflation fell 0.4% in May, per data out of the Commerce Department.
"There is no question that consumers have hit pause on discretionary spending, particularly in the home goods market," Overstock CEO Jonathan Johnson said on Yahoo Finance Live. "But we think it's a pause, it's not a stop."
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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