Time to Keep Your Eye on Retailers

In my free time I like to jump in my Miata and head somewhere I’ve never been. Each new place offers the chance to experience a great gluten-free meal, a funky coffee shop, attractions (touristy and weird), and local handcrafts.

Last Friday, I was wandering around the Logan Street market in Louisville. I was intrigued by a unique tea blend and was offered a Black Friday discount. I briefly gave the clerk a blank stare, thinking, “Did I drive through a wormhole and lose a whole week?” He added “because it’s a Friday in November.”

You no longer have to stand outside in the cold at 2 am on the day after Thanksgiving to get a sale price. The deal window has crept out almost a whole month in both directions. From Halloween to Christmas, retailers want you to feel like you’re getting a great deal.

Last year, consumers spent a record-breaking $994 billion on holiday shopping, according to the National Retail Foundation (NRF). That was up 4% compared to 2023. Will we hit $1 trillion this year?

I’m not sure I’d bet on that.

The latest University of Michigan Survey of Consumers sentiment rating was just 51. That’s down 29% from last year. In the past 40 years, we’ve only seen a reading below 52 one other time—the summer of 2022.

Investors Are Watching Holiday Sales

I usually add some retailers to my portfolio this time of year. Healthy holiday sales mean excitement ahead for those stocks come January. I would look for retailers whose stock was unfairly beaten down by third-quarter earnings. For them, good holiday sales numbers should bump shares higher.

Of course, they must have a solid and secure dividend in case I have to hold them for longer.

Dividends are the main focus of my investing strategy, but I still look for reasonable speculations when it makes sense. It’s the dividend income that adds support during the speculation period.

That low UMich consumer sentiment reading makes me very nervous to follow my retailer stock buying holiday ritual this year. It’s one reason we’re seeing so many sales before we even sit down for Thanksgiving dinner. And that caution is supported by the numbers retailers just reported for the third quarter.

Value Is the Name of the Game

Both Walmart (WMT) and The TJX Companies (TJX) beat analyst expectations for the third quarter. Both also raised their full-year earnings forecasts. Home Depot (HD), Kohl’s Corp. (KSS), and luxury brands are struggling.

Value-conscious consumers are in the driver’s seat. Retailers that can keep their prices low are being rewarded with higher sales.

Shares of WMT are up 17.6% over the past year, and TJX is up 21%. This has dropped their dividend yields to 0.9% and 1.1%, respectively—far below my 3.5% minimum. Ignoring the low dividends, both have P/E ratios over 30. That’s too high for me to be interested in either of these giants.

On the other side, shares of HD are down 19% over the past year, but its dividend is still just 2.6%. Kohls shares are down 14% for a dividend of 3.1%. I will not be taking a fingers-crossed journey against consumer trends with either of these companies.

As much as I’m disappointed in the lack of opportunity, there are two important takeaways.

First, don’t force an opportunity, even if it’s worked for you before. Second, keep an eye on the holiday shopping season. It will tell us a lot about the health of the overall economy. And it will help shape investor sentiment during the January earnings season.

For more income, now and in the future,

Kelly Green