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4 Retail Stocks to Avoid as Consumers Spend Less on Discretionary Items

In April, retail sales surged 0.9%, posting a fourth consecutive month despite the soaring prices. Inflation has caused companies to raise prices for their goods to cover the costs of factors like transportation and labor. And given the Fed’s aggressive stance on inflation, economists are concerned that a fast rise in interest rates could cause a recession and dampen consumer demand.

Consumers are shifting their spending away from the discretionary sector. According to a Morning Consult report, “Discretionary purchases’ share of wallet trended lower to make space for the rising cost of household staples in recent months. The pullback in spending has been more pronounced for physical products than for services, as consumers increasingly revert to pre-pandemic trends.” Consumers are prioritizing staples amid the inflationary environment.

With the Consumer Discretionary Select Sector SPDR Fund (XLY) tumbling 31.3% year-to-date as compared to the broader SPDR S&P 500 ETF Trust’s (SPY) 18% decline this year, we think the discretionary retail stocks NIKE, Inc. (NKE), Starbucks Corporation (SBUX), Five Below, Inc. (FIVE), and Williams-Sonoma, Inc. (WSM) might be best avoided now.

NIKE, Inc. (NKE)

The footwear and accessories giant NKE engage in the design, development, and sale of athletic footwear, apparel, and equipment globally. The company offers the NIKE brand products under the running, NIKE basketball, Jordan brand, football, training, and sportswear categories.

For the fiscal third quarter ended February 28, NKE’s revenues increased 5% year-over-year to $10.87 billion. However, its net income decreased 3.7% from the prior-year quarter to $1.40 billion. Earnings per common share declined 3.3% from the same period the prior year to $0.87.

The consensus EPS estimate of $0.86 for the quarter ending May 2022 indicates a 7.5% year-over-year decrease. Likewise, the consensus revenue estimate for the same quarter of $12.29 billion reflects a marginal decline from the prior-year period.

The stock has declined 18.6% over the past year and 35.2% year-to-date to close Friday’s trading session at $108.

NKE’s POWR Ratings reflect this bleak outlook. The stock has a Value grade of D. In the 37-stock Athletics & Recreation industry, it is ranked #17. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Click here to see the additional POWR Ratings for NKE (Growth, Momentum, Stability, Sentiment, and Quality).

Starbucks Corporation (SBUX)

A popular coffee retail mogul, SBUX roasts, markets, and retails specialty coffee over the world. The company operates through the three broad segments of North America; International; and Channel Development.

In May, SBUX CEO Howard Schultz announced that the company would take up additional investments for increased pay, modernized training, collaboration, and store innovation. This is expected to result in nearly $1 billion of investments this fiscal year.

SBUX’s total net revenues increased 14.5% year-over-year to $7.64 billion in the fiscal second quarter ended April 3. On the other hand, non-GAAP operating income and non-GAAP EPS declined 6.4% and 3.3% from the prior-year period to $996.40 million and $0.59.

Analysts expect SBUX’s EPS to decrease 24.8% year-over-year to $0.76 for the fiscal quarter ending June 2022.

Over the past year, the stock has declined 33.8% and 37.3% year-to-date to close Friday’s trading session at $73.39.

According to our POWR Ratings, SBUX has a D grade for Growth. It is ranked #23 out of the 44 stocks in the Restaurants industry.

To see the additional POWR Ratings for Value, Momentum, Stability, Sentiment, and Quality for SBUX, click here.

Five Below, Inc. (FIVE)

FIVE operates as a specialty value retailer that offers accessories, like socks, jewelry, t-shirts, branded cosmetics, and items used for personalizing living spaces. The company primarily serves tween and teen customers.

For the fiscal year ended January 29, FIVE’s net cash provided by operating activities decreased 10.4% year-over-year to $327.91 million. Net cash used in investing activities increased 62.3% year-over-year to $465.60 million. The company’s cash and cash equivalent balance came in at $64.97 million, down 75.8% from the prior year.

Street expects FIVE’s EPS for the quarter ended April 2022 to decline 34.1% from the prior-year quarter to $0.58.

The stock has declined 34.4% over the past year and 43.2% year-to-date to close Friday’s trading session at $117.54.

FIVE has a Growth, Value, and Stability grade of D. In the 44-stock Specialty Retailers industry, it is ranked #34.

Click here to see the additional POWR Ratings for FIVE (Momentum, Sentiment, and Quality).

Williams-Sonoma, Inc. (WSM)

WSM is an omnichannel specialty retailer for various home products. The company offers cooking and dining and provides cookbooks under the Williams Sonoma Home brand, as well as home furnishings and decorative accessories under the Williams Sonoma lifestyle brand.

On May 18, WSM’s portfolio brand Pottery Barn Teen’s dorm furnishings and essentials subsidiary, Pottery Barn Dorm, announced its Ship-to-Store feature that would allow customers to shop dorm and college essentials online from Pottery Barn Dorm and ship items to any of the 552 WSM brand retail locations. However, the gains from this venture might be stretched over a long period of time.

For the fiscal year ended January 30, WSM’s net cash used in investing activities increased 34% year-over-year to $226.25 million. Net cash used in financing activities rose 335% from the prior year to $1.49 billion. The company’s cash and cash equivalents balance stood at $850.34 million, down 29.2% from the prior year.

Street EPS estimate for the quarter ended April 2022 of $2.88 reflects a 1.7% year-over-year decline.

WSM’s shares have lost 33.7% over the past year and 36.1% year-to-date to close Friday’s trading session at $108.15.

WSM has a D grade for Momentum, Stability, and Sentiment. In the 63-stock Home Improvement & Goods industry, it is ranked #21.

In addition to the POWR Rating grades we’ve stated above, one can see WSM ratings for Growth, Value, and Quality here.


NKE shares were trading at $107.29 per share on Monday afternoon, down $0.71 (-0.66%). Year-to-date, NKE has declined -35.48%, versus a -16.58% rise in the benchmark S&P 500 index during the same period.



About the Author: Anushka Dutta


Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.

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