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Goldman Concerned Over Retail Stocks, Where To Park The Money

Advance Auto Parts Inc NYSE:AAP, American Eagle Outfitters, Inc. NYSE:AEO - Goldman Concerned Over Retail Stocks, Where To Park The Money

While the widespread fears of recession have faded, Goldman is concerned that the "setup actually appears tougher" for the retail/discretionary portion of its coverage.

4 Concerns

Goldman has put out four concerning factors for the retail stock outlook.

1. Energy Pricing Peak
Analyst Matthew Fassler said, "The decline in energy prices appears to have peaked," and "energy is likely to have a diminishing contribution to consumer discretionary cash flow over the course of the year, and into 2017."

"We model only gradual moderation in discretionary cash flow on an annual basis, to 4.4 percent from 5.3 percent prior to considering the savings rate, and to 4.6 percent from 5.1 percent after contemplating the savings rate [...] 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," Fassler elaborated.

Related Link: Retail Earnings Parade Begins: Target, Wal-Mart In The Spotlight

2. Weak USD
Meanwhile, the analyst noted a weak dollar against key currencies such as the euro, Canadian dollar, British pound and Australian dollar could hurt retail margins as U.S. retailers are net importers. The exceptions are firms having significant international operations and retailers catering to the tourist market.

3. Minimum Wages Increase
Another concern is the increase in minimum wages, which "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," Fassler noted.

The analyst highlighted that the summer is a tough season for retail stocks.

4. E-Commerce Pressure
Finally, continued pressure from e-commerce (read: the likes of Amazon.com, Inc. AMZN 1.28%) is weighing on margins of retailers.

"Retail stocks have already sputtered of late, driven by tougher April trends from several firms reporting sales in recent days, and relative multiples for several sectors, including apparel brands, hardlines, and specialty, are below their long-run averages, but the aforementioned issues likely still need to play out, in our view," Fassler added.

Retail Names Galore

Softer Dollar, Less Volatility Exposure
Under this scenario, Goldman favor firms aided by a softer dollar, but less exposed to volatility in the 10-year. Key stocks include:

Mall-Based Retail
Goldman is guarded on mall-based retailing. Sell-rated stocks in that world include:

Related Link: Retail Earnings Parade Continues: Home Depot, Lowe's Center Stage

Leisure Sector
Among the leisure sector, Goldman likes the following:

And Others
Goldman also favors:

A Few More Favorites
The brokerage also likes the following, saying these companies are "secular growth stories with disruptive elements to their business models":

  • Kraft Heinz Co

Latest Ratings for AAP

DateFirmActionFromTo
May 2016Goldman SachsUpgradesNeutralBuy
May 2016Raymond JamesDowngradesStrong BuyMarket Perform
Apr 2016Gabelli & CoInitiates Coverage onHold

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