The SPDR S&P 500 Retail ETF surged by up to 7% on Thursday after U.S. inflation numbers were released, indicating investors' bullishness about the sector.
U.S. inflation numbers settled lower as the core price index ticked up only 0.4% (0.3% less than anticipated). Core inflation rose by only 0.3%, indicating the interest rate hike cycle might be set to plateau, meaning policymakers could tone down their contractionary measures.
What does all this mean for retail stocks?
Retrospectively, it means retail spending has likely slowed; however, a break in the inflation curve means expansionary policies could be implemented sooner than expected, in turn rejuvenating retail spending.
The financial markets are forward-looking; thus, investors will likely speculate on cyclical assets such as retail stocks before tangible effects appear. As mentioned, retail stocks are cyclical, so a lower interest rate environment would probably set a platform for them to prosper.
Louis Vuitton Moët and Hennessy
LVMH Moet Hennessy Louis Vuitton SE (MIL:LVMH, Financial), otherwise known as LVMH, is a European luxury goods retailer with a global presence. The company sells high-end accessories, alcoholic beverages, clothing and related goods.
The company's strength is embedded in its successful branding strategy and Veblen status. The latter refers to the company's ability to avoid receding consumer demand whenever macroeconomic headwinds arise, as Veblen goods mainly cater to the upper echelon of consumers that do not mind spending during trying economic periods.
The company released its third-quarter revenue report last month, revealing a 20% year-over-year gain in organic sales. Much of LVMH's recent growth was spurred on by its fashion and leather goods segment, which rose 31% amid surging demand for its seasonal fashion items. Furthermore, LVMH has benefited from a 23% year-over-year spike in alcoholic beverage demand as lockdown restrictions are now eased in most parts of the world.
GuruFocus' profitability rank illustrates the robustness of LVMH's financial statements. For example, the company boasts a 28.62% return on equity, demonstrating a sublime level of shareholder value.
Lastly, LVMH has formed a momentum pattern. The stock has risen by approximately 23% in the past month, driving its five-day relative strength index beyond the 60 handle.
Abercrombie & Fitch
Abercrombie & Fitch Co.'s (ANF, Financial) stock surged by up to 11% after the latest U.S. inflation report was released, suggesting it could be one of the primary breadwinners when the interest rate cycle pivots.
Furthermore, Abercrombie possesses attractive fundamentals. For example, the company's operating margin expanded by 8% during the past year amid aggressive digitization of the business. The digitalized business model includes data-driven decision-making, allowing it to cut costs while potentially enhancing overall sales-based business intelligence.
Furthermore, the company recently received backing from Wall Street after Citigroup provided positive guidance via a "90-day positive catalyst watch" note. The note read: "There is no question that the business is facing challenges in 2022, including sales pressure in its Hollister business and promotional pressures from an apparel landscape that is over-inventoried. And we do not expect these pressures to inflect anytime soon."
Citi's note juxtaposed its initial assessment, stating, "However, with an EV of $700M, the stock currently trades at an EV/sales ratio of 0.20x (near all-time low), which we believe indicates the market is discounting an overly bearish scenario and under-appreciates ANF's balance sheet."
GuruFocus' valuation box suggests that value might be in store. The company's free cash flow implied value means the asset could nearly double in worth. Moreover, Abercrombie's price-sales (0.28) and price-earnings (15.16) ratios indicate market participants have overlooked the stock's cyclical potential for quite some time.
Nike
Nike Inc. (NKE, Financial) is one of the ultimate brand names of modern commerce. The company produces a product range that serves multiple groups of consumers, which was again proved in its 4% year-over-year revenue growth.
One of the fundamental attractions of Nike is its 45.38% gross profit margin, indicating the company has achieved economies of scale. In addition, the company's 25.48% return on invested capital implies it possesses pricing power in its industry. Thus, it is plausible to conclude Nike holds both cost and price advantages, leaving its shareholders with plenty of residual value.
Much like Abercrombie, a recent value-add to Nike is its digitalized sales strategy, which has assisted it in optimizing its inventory turnover ratio. Moreover, the sports apparel company's direct-to-consumer approach has allowed it to understand its end buyers better and optimize its branding strategy.
At first glance, Nike's valuation metrics seem elevated. However, the stock is trading at a cyclical discount, with its price-earnings and price-book ratios reading at 40.72% and 35.72% normalized discounts. Lastly, GuruFocus' valuation box suggests this is an outstanding stock to consider as its fair value exceeds its market price by roughly 36%.
Concluding thoughts
Retail stocks could prosper amid signs that a "Fed Pivot" could come sooner than most market participants anticipated. Most retail stocks suffered tremendous losses during 2022's bear market; nonetheless, the incurred losses could be recouped if the current macroeconomic trend continues.
Best-in-class stocks such as LVMH, Abercrombie and Nike all look set for a pivot as their key metrics are aligned toward the upside.
