The government reported last week that U.S. retail sales rose 0.7% in July, a sign of strength in the sector. But with other recession predictors flashing red, it’s worth considering what investors should do with retail stocks in the event of a recession.
Loop Capital Markets analyst Anthony Chukumba looked back to the last recession in 2008 for answers. In that downturn, the top performers tended to be companies that served to people who had fallen on hard times. Dollar stores outperformed, as did rent-to-own retailers. Fewer people had access to credit, so they depended more on companies allowing them to pay for things in installments.
“On the other end of the spectrum, Williams-Sonoma ’s (WSM), GameStop ’s and Ulta Beauty ’s (ULTA) comps slowed materially,” he noted. Dollar General, Big Lots (BIG) and Gamestop (GAME) all reported the largest increase in operating margins in 2008, Chukumba said. GameStop’s gains are partly explained by the fast growth at the time of PlayStation 3 and Xbox 360 adoption—a tailwind that isn’t as strong right now.