Don't expect retail stocks to outperform the market this holiday season, analyst says

By Steve Gelsi

Retail stocks typically lag the broad market from Black Friday to Christmas, but snap back in Q1: D.A. Davidson

You may be blessed to get lots of gifts this holiday season, but retail stock outperformance is probably not one of them, based on trends from the past 13 years, analysts at D.A. Davison said on Friday.

On the bright side, once the holiday season is over, retail stocks often outperform the broad market in the first quarter.

The SPDR S&P Retail ETF XRT has underperformed the S&P 500 SPX by 2.1% from Black Friday until the end of the year since 2010 on average, D.A. Davidson analyst Michael Baker said.

The index typically falls 0.8% during this period and has underperformed in 10 of the last 13 years, including 4.6% underperformance against the S&P 500 in 2022.

Among individual retail stocks, "the worst performers are those that have the highest holiday exposure," Baker said.

The most sluggish stock performers during the holidays have been Dick's Sporting Goods Inc. (DKS) and Best Buy Co. Inc. (BBY) due to their above-average sales exposure to the busy shopping season.

Best Buy chalks up more than 40% of its profits in the fourth quarter, while Dick's makes about 30%.

BJ's Wholesale Club Holdings Inc. (BJ) has also been an underperformer on average, D.A. Davidson noted.

Meanwhile, Lowe's Cos. (LOW) and Home Depot Inc. (HD) stand out as the safest names to hold during the holiday season because their busiest time of year is in the spring when people increase their home improvement and gardening activities. In 10 of the past 13 years, Lowe's has outperformed, while Home Depot has done so in eight of the past 13.

Another outperformer has been the auto parts sector, with AutoZone Inc. (AZO) the leader of that group during the holidays, analysts said.

Looking past the holiday season, the SPDR S&P Retail ETF has often perked up in the first quarter.

"The XRT typically stays weak throughout December and into early January as retailers confess their Christmas numbers," Baker said. "But, once investors turn the page on Christmas risk, retail starts to do better, with both January and February being better months of relative performance for the group historically."

Over the past 13 years, the XRT has averaged a 3.8% gain in the first quarter, beating the S&P 500 by 1.2% on average, he said.

While the first quarter outperformance has taken place in just six of the past 13 years, it's done so with a wide margin during those times. In those six years of outperformance, the SPDR S&P Retail ETF has beaten the S&P 500 by about 10%.

-Steve Gelsi

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11-24-23 0746ET

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