The Outlook for Retailers in 2024

The cold weather and post-holiday blues have many of us yearning for warmer days, and it seems retailers are no exception. The start of 2024 has brought some challenges for the sector, with the SPDR S&P Retail ETF experiencing a 3% decline in the first few days of the year. This decline is mirrored by the broader S&P 500, which has seen a 1.5% drop so far.

While consumers seemingly didn’t shy away from spending during the holiday season, investors are now more concerned about what comes next. Without a compelling reason to keep shopping, their focus has shifted to future consumer behavior. Analyst Aneesha Sherman from Bernstein acknowledges these concerns.

According to Sherman, “2024 is shaping up to be a year of two halves for U.S. consumer discretionary spending.” She explains, “The first half may see a middle-income squeeze and a shift towards off-price retailers, followed by a second-half rally in sportswear and brands driven by easy comparable sales and interest rate cuts.”

There are several factors putting pressure on the budgets of middle-class consumers. Many have already exhausted their pandemic savings due to years of inflation. Furthermore, student loan payments have resumed, and higher interest rates are inflating the cost of credit card debt. Given these constraints, it’s no surprise that Sherman anticipates these Americans will turn to bargain hunting, opting for off-price retailers rather than mainstream brands and department stores.

Jonathan Komp, an analyst at Baird, shares a cautious outlook on specialty retail. He warns that earnings estimates may be too optimistic and that high valuations offer little room for error. Komp notes that the current macroeconomic visibility is limited, which could impact the fourth-quarter rally in stocks and positive earnings revisions.

Despite these challenges, both analysts foresee better times ahead, particularly in the second half of the year.

Sportswear Brands Set to Soar, According to Experts

Market experts are confident that sportswear brands will see a significant boost in the coming months. With favorable market conditions, stronger retail order books, and recent rate cuts, brands like Nike, Burlington Stores, TJX Cos., On Holdings, Planet Fitness, and Deckers Outdoors are poised for success.

One notable expert, Sherman, believes that Burlington Stores deserves recognition as the top pick for the next 12 months. Despite the underdog reputation, Burlington Stores has a promising 27% annual growth rate for earnings per share that the market has largely overlooked. With a target price of $218, Sherman sees tremendous potential in this off-price retailer.

Similarly, Sherman identifies TJX Cos. as a top pick for the next two years. TJX Cos. has been expanding beyond conventional off-price offerings, delving into new product categories, higher price points, and attracting higher-income customer segments. This strategic shift is predicted to drive higher margins and comparable sales. Sherman maintains a $107 price target for TJX Cos., projecting a 17% gain from its latest closing price.

While Sherman acknowledges the positive outlook for both Burlington Stores and TJX Cos., she also places Nike at the forefront of her recommendations for the next six months. Despite a temporary setback in December when Nike issued a warning regarding its fiscal 2024 revenue, Sherman believes that the market overreacted. She has set a price target of $134 for Nike, suggesting a potential upside of nearly 30%.

Another expert, Baird’s Komp, advises investors to choose wisely in this market. Among his top favorites are prominent sportswear brands such as Nike, On Holdings, Planet Fitness, and Deckers Outdoors. These companies possess visible brand drivers and are known for their commitment to quality.

As we approach the holiday season, many retailers will be reporting their results. However, investors have already set their sights on the future, particularly on the year 2024. Even if the first half of the year may present some challenges, there is optimism that the sector will ultimately achieve positive results. With a combination of favorable market conditions, strategic expansion, and strong brand appeal, sportswear brands are expected to finish the year on a high note.

By Teresa Rivas

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