M Macys Inc

By Akane Otani 

Everyone knows that Amazon.com has left retailers for dead. Just don't tell investors in some stocks of big store chains.

Shares of retailers are enjoying their biggest rally in years, an unexpected turnaround fueled by strong earnings, buoyant consumer confidence and a nationwide shopping spree.

The SPDR S&P Retail ETF is up 11% this year, more than tripling the S&P 500's 3.5% gain. During Tuesday's market rout, the retail ETF fell less than the broader market. Share prices of department stores like Macy's Inc. and Dillard's Inc. have risen more than 55% this year, even edging out Amazon.com's 50% advance.

The sector's big gains represent an abrupt reversal from previous years, when competition from e-commerce giants like Amazon pounded many traditional retailers, everything from teen apparel to companies making auto accessories. The S&P Retail Index had underperformed the S&P 500 in four of the last five years.

Retail's sudden resurgence is sparking a debate over whether flush-feeling consumers can keep the rally going, or if a series of temporary factors boosted the stocks in a way that is likely to fade in the second half of the year.

Some investors have found reasons to be optimistic. For one, many retailers have posted better-than-expected earnings reports: Macy's, Home Depot Inc. and Walmart Inc. all reporting same-store sales rising in the latest quarter. That has lifted share prices for some stocks whose valuations had fallen to single digits last year.

Retail sales -- a measure of what Americans spend on everything from cars to clothing to sporting goods -- also rose 0.8% last month from a year earlier, according to the Commerce Department. Analysts attributed the gains, which marked the biggest one-month jump since November, to a combination of rising wages, low unemployment and tax cuts that have left many Americans with more money to spend -- all things that retailers hope will keep business at their stores humming.

"It is nice to see that consumer confidence is improving...and that [consumers are] voting on apparel certainly is a help in the industry," said Fran Horowitz-Bonadies, chief executive officer of Abercrombie & Fitch Co., on the firm's earnings call at the start of the month.

Still, some analysts caution that retail's recent rebound could be temporary, driven heavily by factors like one-time gains from the U.S. tax overhaul rather than fundamental changes in the industry.

"Retail has received a second wind from the tax cuts which we think will ultimately fade," said Morgan Stanley analysts in a recent report.

Some analysts are forecasting a steep deceleration in earnings growth for the sector in the coming months. "If so, look for the stocks to roll over as well," Morgan Stanley analysts wrote.

Other analysts point to the dollar as a reason why the rally may not last. While many retailers cited dollar weakness as boosting spending by foreign customers during the last quarter, the currency has since rebounded. Further dollar gains would make retailers' goods more expensive to customers abroad, potentially slowing sales at companies with large multinational presences.

"People are saying, okay, these guys aren't going away now, so after the tremendous pressure we saw in 2016 and 2017, a number of those names are doing better," said Jim Tierney, chief investment officer of concentrated U.S. growth at AllianceBernstein.

He remains cautious on retail in the longer term, despite this year's comeback, likening its recent performance to a "dead cat bounce": a short rebound following a sharp and prolonged selloff.

Macy's, which fell 30% in 2017 even as the broader S&P 500 jumped 19%, has climbed 57% after closing dozens of stores while sales at its remaining stores have rebounded. In May, the company posted same-store sales that surpassed analysts' estimates, thanks to a pickup in spending by international tourists, revamped shoe and fine jewelry departments and increased spending on full-priced goods by customers.

Specialty retailers have also fared well. Dick's Sporting Goods Inc. is up 28% after losing 46% in 2017, buoyed by reports showing its profits growing even as its hunting business suffered following a decision to tighten gun policies. Teen retailers Abercrombie & Fitch and American Eagle Outfitters Inc., which both posted better-than-expected same-store sales for the latest quarter, have risen more than 30% apiece.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

June 20, 2018 16:44 ET (20:44 GMT)

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