Market Insider

Retailers Hit Highs—Time to Be Selective: Analysts


April’s weak same-store sales may be due to several seasonal factors, but analysts warn that the reports could be a wake-up call for investors to be more selective on the heels of the sector's recent rally.

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Retail has seen an impressive rally this year, with the S&P retail index hitting a three-year high on Wednesday. Consumer discretionary has been the best sector performer in the last three months.

"When you look at historical stock price performance, the group performs better in the fourth quarter and the first quarter," Dana Telsey, CEO of Telsey Advisory Group, said on CNBC's "Fast Money Halftime Report." "Second quarter is your weaker quarter."

For April, discounters including Target and Costco posted sales that missed Wall Street estimates. Telsey says that could be attributed to the rise in gasoline prices.

Meanwhile, higher-end and specialty apparel retailers fared better. And a batch of teen apparel companies such as American Eagle Outfitters , Aeropostale and Gap raised their earnings outlook.

"They're gaining share from the weakness at JCPenney's ," Telsey said of the teen apparel makers. "When you look at the teen retailers, they're also facing some of the easiest comparisons, and you have recoveries in sales and margins. Across the board, we're seeing some apparel sales pickup."

Meanwhile, Adrianne Shapira, an analyst at Goldman Sachs, said she sees continued outperformance at the higher-end stores. She also expects the group to post better-than-expected earnings in coming weeks.

“We’re going to be heading into earnings for retail and we definitely saw some April showers, but the first quarter will continue to flower for many of these retailers and that will be important to continue to drive improved confidence at the high end.”

Shapira has a “buy” rating on Nordstrom, Ralph Lauren, Family Dollar and Target.

But Shapira has a "sell" rating on Sears , saying she expects further downward pressure on the stock.

“Our price target is around $29-$30 a share so we still have some room on the downside. … We know how the movie ends here, and categories that they’ve been strong at historically, such as electronics, are moving online.”

Meanwhile, some strategists seemed to be more cautious of the consumer discretionary sector in general, following the big rally.

“It doesn’t look like [the sector] is ready to fall off the cliff, but it may have run ahead of itself,” said Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch.

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