Retail Could Have a Tough Time in 2024. These Stocks Could Stand Out.

While plenty of people are still spending on things like the vacations and live events that were on pause during the pandemic—and trimming their budgets amid higher prices—they haven’t foregone shopping entirely. Retail stocks’ gains have come alongside some upbeat financial results and economic data, as well as a record-breaking start to this year’s holiday shopping season.

Despite the sector’s strong showing in 2023, caution abounds on Wall Street as analysts look ahead to the new year. They cite ongoing pressure on consumers, along with a somewhat guarded tone from management teams—including at bellwether
Amazon.com,
whose holiday quarter sales outlook was below consensus.

UBS analyst Jay Sole predicts retail will benefit from a strong end to the holiday season, but says the start of 2024 is more of an open question. Sales growth looks poised to decelerate in the face of more modest consumer spending and shrinking savings, he warns.

Baird analyst Peter Benedict has similar concerns, warning we are entering 2024 with “another complex setup” for the group. Macroeconomic factors— including higher consumer prices and the Federal Reserve’s interest-rate decisions—will likely play out against specific stock drivers, he says. He also questions the durability of retail’s recent rally, as consensus earnings estimates could continue to slip lower.

Consumer weakness could show up especially for the more discretionary softline retailers that UBS’s Sole covers. That group includes mall stalwarts like department stores
Macy’s
and
Nordstrom,
off-price players led by TJX Cos., and athleisure names like
Under Armour.

“We continue to believe inflation, lapping fiscal stimulus, and Fed rate hikes are contributing to weak spending intentions and the impact from these factors will have an increasingly negative impact,” he wrote Monday. “Given a tough January compare and a financially challenged consumer, we think spending growth will decelerate post-Christmas.”

The upshot could be some pressure on these retailers’ stock valuations, he says. This all means he is selective when it comes to picking stocks in the sector. Footwear names including On Holdings,
Nike,
and Deckers Outdoors are among his favorites. He says they have solid fundamental outlooks and score high on growth expected 2024 growth metrics.

Even e-commerce leaders that have seen the bulk of the sector’s spoils could struggle a bit more next year, analysts say. When Amazon reported results in October, it provided fourth-quarter revenue guidance below the Street’s expectations.

“Companies have offered warnings on consumers trading down and prioritizing essentials, leading to more promos and discounting,” Bernstein analyst Mark Shmulik writes.

Retailers offered conservative guidance for fourth-quarter revenue growth, blaming ”consumer-related weakness,” he says, but notes Black Friday/Cyber Monday results could offer a modest positive signal.

Of course, one theme that will likely continue 2024 is the disparity in performance between e-commerce companies and bricks-and-mortar stores. While tight discretionary spending patterns have hurt companies like
Etsy
and
eBay,
others like Amazon have still been able to make up for that with strong trends in consumables and everyday products, Shmulik says.

E-commerce growth is still on the rise, jumping an inflation-adjusted 18% year over year in October, well ahead of the broader retail landscape’s estimated 1% decline, Shmulik writes. If inflation continues to cool, he says that should leave more dollars on the table for consumers to spend online.

Meanwhile, brick-and-mortar stores’ e-commerce results have been mixed.
Walmart
stood out, thanks to its 24% U.S. e-commerce growth in its fiscal third quarter, Shmulik writes. But
Target
and Lowe’s have been relative laggards, thanks to negative e-commerce growth in their recent reports, he adds.

Amazon remains Shmulik’s favorite idea for 2024, even with its shrinking 2024 consensus sales estimates.

Of course, there are some positives in sight that could help provide a floor for some retail stocks. Baird’s Benedict doesn’t think the market is entirely wrong to place more emphasis on the potential for interest rate cuts rather than cautious individual company commentary. Lower rates would be a meaningful tailwind for the group, he says. In addition, 2024 will likely mark a trough in terms of cuts to top- and bottom-line estimates.

Still, with volatility likely being the major theme in the months ahead, his favorite stock picks for 2024 “rely heavily on idiosyncratic profit and loss drivers.” Those include
Yeti Holdings,
which he thinks will benefit from new retail partners and international growth, and
Mister Car Wash,
whose scale and subscription base provides earnings visibility.

In the end, retail’s recent run-up means investors’ hopes will be high when holiday quarter results are announced early next year. That may not line up with the guarded tone many management teams have taken lately.

However, as with so many things, the bigger 2024 picture will likely hinge on the path of interest rates, and whether U.S. consumers can be coaxed into continued spending.

Write to Teresa Rivas at teresa.rivas@barrons.com