Retail stocks are having a rough year.
The S&P SPDR Retail ETF (XRT) is down 4.8% year to date, and consumer discretionary as a whole has been the worst performing of the 11 major S&P sectors. It makes sense. Tariffs threaten to hit U.S. retailers hardest, including the many companies that sell products like toys, child car seats, and sports apparel, most of which are made in places like China, Indonesia, Japan and Thailand – the places with the highest potential tariff rates. Combine that with escalating fears of a U.S. recession – also brought on by tariffs – and it could be a double whammy for retailers who don’t sell the essential everyday items that consumers buy regardless of the economic environment.
Note that I said “could.”
As of now, tariffs are on hold. In early April, a week after “Liberation Day,” President Trump instituted a 90-day pause on high tariffs with basically every country but China. Earlier this month, the administration inked a tariff deal with the U.K. Then, two weeks ago, a 90-day tariff cease-fire went into effect. So as of this moment, there are no high tariffs. Deals to avoid tariffs could be worked out with each of the roughly 130 nations they were levied against before they ever do any real damage. If that happens, then it could be a “no harm, no foul” situation, and the U.S. economy will continue on its merry way, with consumers never really reining in their spending.
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Indeed, most of the hard data still points to a healthy U.S. economy. Inflation is down to a four-year low. Corporate earnings are on track for a second straight quarter of double-digit growth. The jobs market is holding up fine. U.S. GDP contracted slightly in Q1, but with major caveats, as companies tried to frontload their imports to avoid impending tariffs, causing the number (-0.3%) to skew negative. And, perhaps most importantly, retail sales have been unharmed, with April sales up 5.2% year over year – the same number as March. They were also 0.1% higher in April than in March.
While retailers have not matched the earnings growth of the average S&P company in the first quarter – consumer discretionaries have reported 8.2% EPS growth, vs. the 13.6% growth rate among S&P companies as a whole – that’s well ahead of the mere 0.6% growth that was expected from retailers before earnings season began, as the sector has posted more earnings season surprises than any other sector aside from communication services.
U.S. retailers are doing just fine. Their share prices are not. And therein lies an opportunity. Consumer discretionaries as a group trade at 20.5x forward earnings estimates, less than the 22.1 forward P/E ratio in the S&P. That’s roughly middle of the pack among S&P sectors in terms of valuation. But for a sector that’s posted the worst performance year to date.
3 Undervalued Retail Stocks to Buy Now
What are some of the more undervalued retail stocks? Here are three others with intriguing combinations of value and growth:
Bath & Body Works (BBWI)
Forward P/E ratio: 9.3
Price-to-sales: 1.01
Projected 2025 EPS growth: 8.8%
Urban Outfitters (URBN)
Forward P/E ratio: 14.0
Price-to-sales: 1.04
Projected 2025 EPS growth: 9.6%
Hilton Grand Vacations (HGV)
Forward P/E ratio: 11.4
Price-to-sales: 0.82
Projected 2025 EPS growth: 14.6%
In addition to these discounted retailers, I currently recommend two others in my Cabot Value Investor advisory, both of which have posted impressive early returns. If you want to know their names, simply click here. But you could probably do just fine with any of the three retailers listed above.
On the heels of a swift market recovery, value opportunities are getting harder to come by. But plenty of retail bargains remain. And these are just three of the more appealing options.
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