In two weeks from today, all eyes will be on Black Friday and the official beginning of the holiday shopping season, which for some in the retail sector is the most critical time of the year.
While I do expect consumers to be out and spending in full force, I’m not sure about the retail sector and margins. The decline in gasoline prices should help add some money to the pockets of consumers, but I doubt it will be enough to get consumers to let go of the cash.
Bellwether retail play Wal-Mart Stores Inc. (NYSE/WMT) has been reflective of the retail sector after recording six straight quarters of muted same-store sales. The results have been both domestic and international for the biggest retailer in the world.
So concerned are the folks at Wal-Mart that an internal memo was leaked to the media that asked managers at its U.S. stores to discount meats and baked goods from 7 a.m. onwards to make sure they are sold prior to the expiration date and not wasted. Apparently, the memo also demanded a report on wasted goods to be provided. Clearly, there are concerns surfacing.
Macy’s, Inc. (NYSE/M) was the first major retailer to report and its results suggested some trepidation on the side of consumers in the retail sector. The department store reported a weak 1.3% year-over-year increase in its fiscal third-quarter sales. The key same-store sales metric declined 1.4%. The company also cut its earnings-per-share (EPS) outlook for fiscal 2015 to $4.25–$4.35 per share, down from the previous $4.40–$4.50 per share.
While I do not expect a run to the exits in the retail sector, I continue to believe the upside potential is limited at this time.
The SPDR S&P Retail ETF (NYSEArca/XRT) demonstrates the sideways channel that has been in place. The exchange-traded fund (ETF) appears to be breaking higher, but the sustainability is another issue. The prior wave subsequently ended lower than the previous low, which is bearish, based on my technical analysis.
Chart courtesy of www.StockCharts.com
Unless we see big numbers in the holiday shopping season. I would be careful when looking at the retail sector.
If the numbers are strong, we could see a pop and continuance of the upward break of the XRT. You can play this situation in the retail sector via the use of call options to control the maximum risk you put out. Failure to produce strong retail numbers could be traded via put options on the XRT.