As business conditions improve, retail stocks should see a 20% bounce-back in operating profits in 2021, following a 15% decline in 2020, according to analysts at Moody’s.
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The analysts expect retailers that fell hardest to see the biggest gains, as they reopen and benefit from improvements in cost structures and inventory management. Plus, there’s a pent-up consumer demand for a return to malls and movie theaters.
Department stores, including Macy’s (M), Nordstrom (JWN) and Kohl’s (KSS), will see profits vault 500%, Moody’s predicted in its Dec. 3 report.
For off-price retailers such as Ross Stores (ROSS) and TJX Companies (TJX), they see profits jumping 450%. And for apparel firms L Brands (LB), Gap (GPS) and Tapestry (TPR), they see profits up more than 100%.
Meanwhile, Moody’s expects dollar stores, home improvement stores, discounters and big-box as well as warehouse stores to slow from 2020, as shopping habits normalize.
CFRA analyst Garrett Nelson, too, is cautious on the big-box retail stocks, including Target (TGT) and Costco (COST). He warns that 2020 will be a tough act to follow for those companies.
But he makes one exception. He’s bullish on Walmart (WMT), expecting the new membership-perks program Walmart+ to drive same-store sales higher.
“We think that is going to be a big driver for the company for years to come,” Nelson said.
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Retail Stocks See Bigger Divide
For the likes of Walmart, Costco and IBD Leaderboard stock Target, years of investments in e-commerce and physical capacity paid off in the pandemic. Target’s earnings growth boomed 86% and 105% in its latest two quarters, far above the three-year average of 17%.
The coronavirus crisis widened the gulf between winners and losers in retail.
The big-box retailers were spared the rod of store closures, because they were classified as essential businesses during the pandemic. Other retailers, such as department stores and mall-based chains, deemed “nonessential” and already out of favor, ran adrift.
Many retailers are now on life support, hoping to avoid the fate of scores of other chains last year. S&P Global Market Intelligence tallied 51 retail bankruptcies in 2020 through mid-December, the most since 2009.
Upscale department store Neiman Marcus; Ascena Retail Group, parent of the Ann Taylor apparel brand; and Guitar Center were three of the biggest bankruptcies in 2020.
Indeed, the new year could be key to the survival of department stores like Macy’s, which planned to shut 125 locations by 2023 even before the pandemic struck.
The key to retail stocks in 2021 will again be the coronavirus and how quickly vaccines can tame it. So far, however, the pace of actually putting shots in people’s arms has been much slower than anticipated, potentially delaying when sales can return to normal.
“Consumers need to have more confidence that the Covid situation is under control before they return in any significant numbers,” said CFRA’s Nelson.
“We’re looking at a potential rebound in consumer foot traffic and spending come spring. But we really need to see a decline in Covid cases and a more successful distribution of the vaccine than what we have seen so far.”
Find Aparna Narayanan on Twitter at @IBD_Aparna.
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