Investor sentiment toward US hardline retailers has become uneven and is likely to remain so unless macroeconomic headwinds dissipate, UBS Securities said in a note e-mailed Friday.
Describing the prevailing mood as "a mix of apathy, caution, and chagrin," the brokerage said investors have become increasingly selective about hardline retail stocks amid a lack of long-term secular growth potential for the sector.
"Headlines surrounding affordability pressures, interest rates, inflation, labor market disruption, tariffs, freight costs, and geopolitical instability have created a backdrop that feels persistently unsettled," UBS analysts, including Michael Lasser, said in a note to clients. "As a result, many investors increasingly view the sector through a defensive lens rather than an aspirational one."
Last month, official data showed that US inflation accelerated sequentially in July, while consumer spending growth eased. A University of Michigan survey showed that consumer sentiment in the country dropped in August amid concerns that inflation will continue to be high for the "foreseeable future."
Dollar stores have seen an acceleration recently, while retail giant Walmart (WMT) and Costco Wholesale (COST) have seen a "moderation," sparking renewed debate about changing consumer behavior, UBS said.
"Investors continue to monitor credit card delinquencies, wealth effects tied to equity markets, and fuel prices as key variables that could shape spending patterns over the next several quarters," the analysts wrote.
Walmart seems to be undergoing "a gradual regeneration" of its shareholder base, according to the brokerage. "The prevailing view is that the stock may remain range-bound near term as investors wait for proof that the most compelling elements of the investment thesis can translate into tangible financial outcomes," the analysts said.
Costco's latest sales data reignited debate over whether the warehouse chain's recent performance reflects "continued deceleration or the early stages of stabilization," UBS said.
"Bulls remain focused on traffic growth, membership engagement, and the enduring strength of Costco's flywheel," the analysts wrote. "Skeptics question whether the stock can continue to command its premium valuation if the business settles into a slightly lower long-term comp framework."
Following a few quarters of mid-single-digit comparable sales growth at Target (TGT), the investor discussion has moved to debating the retailer's long-term earnings potential from questioning the business' relevance, according to the note.
Walmart, Dollar General (DG), Dollar Tree (DLTR), Best Buy (BBY), Home Depot (HD), and Tractor Supply (TSCO) are generally seen as tariff refund beneficiaries, while Target, Williams-Sonoma (WSM), and Five Below (FIVE) are "more commonly" viewed as the companies on the other end of the spectrum, UBS said.
"This distinction may become increasingly important as investors begin to focus on the anniversary of these benefits and their second- and third-order implications for margins, pricing strategies, and earnings growth moving into next year," the analysts said.
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