Christmas didn’t come early this year for retailers. On November 20, many retail firms announced their earnings ahead of the holiday season. Overall the results were good, though they did add to the already growing concerns over margin compression. Recall, from my market wrap up on the podcast in early October, that many retailers such as Amazon and Target began raising wages.
Some retailers have lowered their guidance for the fourth quarter and 2019. The weakness in retail stocks on the heels of lower guidance comes contrary to the economic backdrop of strong GDP growth, tax cuts, full employment and the highest level of consumer sentiment we’ve seen in decades. Something doesn’t add up. As the holiday season swings into full gear, we’ll be able to see just how conservative or truthful their guidance has been.
Right now, it’s a tough environment for retailers to impress investors given the weakness in Walmart stores last week, after beating its metrics even on e-commerce. Multiple companies reported inline or lower guidance which led to immediate weakness at the open.
Target reported good year-over-year improvement with earnings up 20 percent from a year ago, but below expectations for earnings. Ross Stores beat earnings by one penny but guided lower for fourth quarter comparable store sales gains of one percent to two percent, which is a far cry from last year’s big five percent gain.
Not all retailers had gloomy news. Kohl’s raised 2019 earnings guidance and felt bullish about this holiday season, believing weather to be a less detrimental factor.
The S&P retail index was down 2.73 percent today as a result of market weakness and concerns over a weak holiday season around the corner. The season kicks off Thanksgiving night for some retailers (Target opens at 5 p.m. Thursday and closes at 1 a.m. Friday. Re-opening that same day at 7 a.m.). The S&P retail index has confirmed a trend reversal with Tuesday's low falling below the October low. The next area of support looks to be the first quarter correction lows in February and April.
One glimmer of hope fell within the semiconductor space as many rallied to close positive on the day despite the weakness in the technology sector.
The Philadelphia Semiconductor index ($SOX) was up 0.15 percent today in a sea of red for growth stocks. Leadership has been lacking in the growth sectors, in turn leading to a lack of confidence in any rally attempt.
Non-cyclical sectors: consumer staples, utilities and healthcare continue to outperform firmly carrying the message for a defensive posture in portfolios all October and November. If the semiconductors group can retake the growth mantle to lead the bulls, we might finally see a bottom to this correction. Keep the semiconductors on your watch lists. Don’t hold your breath though, there is a lot of technical work that still needs to take place with a long-term top firmly in place for the semi group.