US retail sales have been down for three straight months and are falling at the fastest pace since Lehman collapsed. This is being reflected in declining EPS Momentum across the sector and in an expensive valuation for retailing stocks.
EPS Momentum in the sector is -0.9% and the rate of decline is accelerating. This is in contrast to the market as a whole, as EPS Momentum across the S&P 500 is -0.13% and has improved in the past month. This is in keeping with previous blogs about the effect of the price of oil.
At 17.7x 12 months forward earnings, the retail sector is above the long run average valuation of 14.7x and hovering around 2007 and 2010 peak levels. The Divergence chart for the sector showing price moves and recent estimate changes at component stocks, illustrates how few companies are experiencing upgrades, with about the same number having downgrades of at least 25%.
The problem with retail is that a lot of businesses have an implicit reliance on inflation to protect margins. These businesses push through annual price increases and hope to have to pay suppliers no more extra than this. In a deflationary environment, these firms are going to come unstuck very quickly.
There are of course plenty of retailers that are used to battling declining product prices, or have a business model built on delivering sustainable efficiency gains. In the last month there have been double digit upgrades for stocks such as Wayfair and American Eagle Outfitters, while even Amazon has broken a long run of downgrades to record an improved outlook in the last five days. That does not do much for its excessive valuation, but nonetheless it is welcome boost at a company that is used to living with often self enforced pricing pain.
Five stocks across the sector flag as having a relative valuation at extreme lows compared with peers, the largest of which is Tiffany. The stock is trading at lows only exceeded when the world was reflecting upon Lehman’s collapse. The Stacked Graph below shows that low relative valuation for Tiffany has in the past coincided with absolute share price lows.
Remember you can generate your own overnight report on Retailing, and any other sector or market, using OTAS Lingo.