High-End Retailers Faring Better Than Low-End Retailers

The latest round of earnings reports from the retail sector may be telling us more than we think. Over the last week we have gotten reports from numerous retailers and the results have been very mixed, but there is somewhat of a pattern.

Macy’s (NYSE: M) reported last Wednesday and the high-end department store blew out earnings expectations and the stock jumped sharply. Last Thursday, Dillard’s (NYSE: DDS) and Nordstrom (NYSE: JWN) both announced better than expected earnings, but the stocks moved in different directions with Dillard’s up and Nordstrom moving down.

We also got an earnings report from Walmart (NYSE: WMT) last Thursday and the company beat EPS estimates, but only by a few pennies. The stock has moved lower since the report.

Jumping ahead to this week we got reports from TJX (NYSE: TJX) and Kohls (NYSE: KSS) on Tuesday. TJX missed their EPS estimate while Kohls beat their estimate. Believe it or not, the stocks moved the opposite of what you would have thought—TJX moved up and Kohls moved down.

Wednesday gave us reports from Tiffany (NYSE: TIF), Ralph Lauren (NYSE: RL) and Target (NYSE: TGT).  Tiffany and Ralph Lauren both beat estimates and both stocks moved sharply higher. Target disappointed on its earnings report and the stock dropped over five percent in the early going.

Have you picked up on the theme yet? Notice how the high-end retailers—Macy’s, Dillard’s, Nordstrom, Tiffany and Ralph Lauren—they all beat estimates. The low-end retailers—Walmart, TJX, Kohls, and Target—either missed estimates or the stock moved down.

What this suggests is that the upper income consumers are faring much better than the lower income consumers. This goes along with the idea that the wage gap in the U.S. is getting wider and that not everyone is benefitting from a stronger economy.

Retail stocks as a whole have lagged the overall market since the beginning of the year and they have lagged the consumer discretionary sector by a fairly wide margin. This tells us that you can’t just buy any retailer and expect it to move higher. The stock performances are very company specific, but the odds seem to favor the higher-end retailers at this time.

While the reports for this quarter aren’t enough to draw a conclusion about the overall economy, it is certainly something that is worth keeping an eye on. If the disparity between the two segments—high-end versus low-end, it could be a bad sign for the overall economy.

You have to keep in mind that companies like Walmart and Target employee far more people than Tiffany and Dillard’s. If the low-end retailers continue to struggle, it could be a sign that the economy is weakening and about to get weaker.

It is certainly worth monitoring for the next few quarters.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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