Goldman Sachs Highlights Four Concerns for Retail Stocks

In a research note Friday, a team of Goldman Sachs analysts, including Matthew Fassler, highlighted four concerning factors for retail stocks. Concerns include energy, minimum wage hikes, seasonality, and the reversal in the dollar.

"...energy is likely to have a diminishing contribution to consumer discretionary cash flow over the course of the year, turning into a headwind 2017. We model only gradual moderation in discretionary cash flow on an annual basis, but within that forecast expect a drag on consumer spending from essential spending' – energy, food, and healthcare – beginning in 3Q2016, for the first time since 3Q2014," said Fassler.

Fassler added that the reversal in the dollar is likely to work against US retailers selling into US consumers.

On wages, the analyst said, "Evolving minimum wage hikes are likely to hit retail – and restaurants – harder than many other segments of the economy, given that retail wage scales are closer to minimums than most other segments of the US economy. While consumers – and retailers – are likely to benefit from higher wage growth, retailers selling into middle- and upper-income consumers but levered to minimum wage increases are likely to face margin pressure over time."

Goldman Sachs noted that tactically, the summer is a tougher season for retail stocks in particular, though also for consumer staples names.

Overall, Goldman Sachs favors firms aided by a softer dollar, but less exposed to volatility in the 10-year. Key stocks include Aramark Services (NYSE: ARMK), Deckers Outdoor (NYSE: DECK), Cedar Fair L.P. (NYSE: FUN), Kraft Heinz (NASDAQ: KHC), Mattel (NASDAQ: MAT), Nike (NYSE: NKE), and V.F. Corp. (NYSE: VFC).

Goldman Sachs also likes leisure, including names like Diamond Resorts (NYSE: DRII), Cedar Fair, Vail Resorts (NYSE: MTN), Royal Caribbean Cruises (NYSE: RCL), and Wyndham Worldwide (NYSE: WYN).

"A number of firms catering to low-end consumers have visibility associated with wage growth, even as the benefits of gas prices recede," said Fassler. He likes Advance Auto Parts (NYSE: AAP), Burlington Stores (NYSE: BURL), Carter's (NYSE: CRI), Dollar General (NYSE: DG), Dollar Tree (NASDAQ: DLTR), HanesBrands (NYSE: HBI), Penn National Gaming (NASDAQ: PENN), Sally Beauty Holdings (NYSE: SBH), and TJX Cos. (NYSE: TJX)

Other names mentioned in the report include Buffalo Wild Wings (NASDAQ: BWLD), CarMax (NYSE: KMX), Monster Beverage (NASDAQ: MNST), Starbucks Coffee (NASDAQ: SBUX), Sportmans Warehouse (NASDAQ: SPWH), and Wayfair (NYSE: W).

Analysts at the bank are "guarded" on mall-based retailing. Sell-rated stocks in that world include American Eagle Outfitters (NYSE: AEO), Abercrombie & Fitch (NYSE: ANF), Express (NYSE: EXPR), Foot Locker (NYSE: FL) and J.C. Penney (NYSE: JCP).

You May Also Be Interested In

• Needham Upgrades Netflix (NFLX) to Buy, 'on Rev Upside from Tech Stack'
• Hays Plc. (HAS:LN) (HAYPF) PT Lowered to GBP1.30 at RBC Capital
• Gold Road Resources Limited (GOR:AU) (ELKMF) PT Raised to AUD2.20 at Jefferies