Why retail stocks deserve to be beaten

The magic carpet trick that most retail stocks have been doing in recent times probably has to come back to the reality of planet Earth.

And very soon.

Shares of retail heavyweights such as Nordstrom, Macy’s, Kohl’s and Simon Property Group were beaten on Tuesday. At first glance, the reason for many of the double-digit percentage sales is not so obvious. Walmart got it out of the water with its second quarter earnings release this morning. Consumers took their big Uncle Sam stimulus checks and splurged on non-essential household items and maybe a few extra bags of frozen food.

Meanwhile, the Home Depot earnings release on Tuesday morning was no slouch either. Armed with very low interest rates (thanks, Federal Reserve Chief Jerome Powell) and a ton of free time, home renovators have boosted Home Depot’s US comparable store sales by 25%. A spokesperson for Home Depot told Yahoo Finance that the increase in sales was its best performance since 2000.

Overall, at least on paper, it’s not a bad way to kick off the retail income season this month. But the good news ends there as Kohl’s and Walmart have posted a dose of gloomy commentary on the current health of retail.

Kohl CEO Michelle Gass left it all on the ground during her call for results, saying there is a lot of “destruction” in retail right now. Gass is right – retail bankruptcies continue to pile up, putting pressure on those who are not about to close their doors. Even though investors are familiar with this retail death tale, hearing a prominent Gass CEO say the word destruction – after a quarter where sales plunged 22.9% – is akin to yelling fire in a crowded theater.

“There are literally thousands of stores that are sadly facing dire consequences and closures,” Gass told analysts, vowing to tackle that market share.

Investors aren’t so sure about this one – Kohl’s shares were rocked 16% in the trading session.

At Walmart, executives warned that sales weakened significantly after its impressive quarter as COVID-19 stimulus checks were exhausted.

“Second quarter sales got off to a strong start, both in-store and online, particularly in general merchandise, aided by government stimulus spending. Grocery sales had another strong quarter. As stimulus funds dwindled, sales began to normalize, but July comps were still up more than 4%, ”Walmart said in a presentation detailing its latest earnings report. The company was referring to trends in its bread and butter business in the United States.

Walmart shares were slightly in the red after jumping about 6% in pre-market trading.

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Given this new wave of gloom – and more likely underway as retailers continue to report profits this month – one has to wonder if the rally in retail stocks is as cooked as a piece of fried chicken.

The VanEck Vectors Retail ETF is up 22% in the past three months amid strong retail sales data, which now seems to be sitting in the rear view mirror in the absence of another stimulus package for retailers. struggling American households. The SPDR Consumer Discretionary Fund has climbed 27% in the past three months. Indeed, that increase also seems exaggerated if consumer spending is about to fall off a cliff – not thanks to clumsy politicians.

“Back to school [shopping] is a huge question mark. And that begs the question now that people have paid their taxes three months later and the additional $ 600 UI may be over, consumers are backing down. This is what investors are asking for now, ”said Stacey Widlitz, founder of SW Retail Advisors, on Yahoo Finance’s The First Trade.

Brian Sozzi is an editor and co-presenter of The first trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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