Retail stocks—discounts and markups

05/19/22
  • So far, Q1 retail earnings have been relatively weak
  • TJX bucked the trend Wednesday, topping estimates and rallying
  • Similar gap moves susceptible to short-term reversals?

Anyone who wasn’t already aware that this has been a rough week for the retail sector only needed to stumble across yesterday’s LiveAction scan for stocks trading at 52-week lows:

Chart 1: LiveAction scan: 52-week lows. Retail names heavily represented.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


That crowd of retail names include Walmart (WMT), which missed its numbers on Tuesday, and Target (TGT), which also came up short on earnings and sold off more than 25% intraday on Wednesday. Not surprisingly, both companies indicated inflation was a challenge.1

One exception to the trend was discount retailer TJX (TJX), which jumped yesterday after beating its earnings estimate and offering a relatively upbeat outlook.2 A day earlier, though, TJX was sitting on the 52-week low scan, too, having fallen to its lowest price in more than 18 months.

Before this week, TJX had been underperforming the broad market (and many of its retail brethren) by a wide margin, while WMT and TGT had been outperforming the S&P 500 (SPX) this year:

Chart 2: TJX (TJX), Target (TGT), Walmart (WMT), S&P 500 (SPX), 12/31/21–5/18/22. YTD ups and downs.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


TJX’s rally yesterday pushed the stock a little closer to the SPX (white line) and WMT on a year-to-date basis, and actually bumped it ahead of TGT.

After gapping higher yesterday morning, TJX rallied as much as 12% intraday before settling in around the middle of the day’s range and closing up 7%, even as the SPX fell more than 4% and inched closer to bear-market territory:

Chart 3: TJX (TJX), 3/24/22–5/18/22. Gapped higher on earnings.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


Not surprisingly, TJX’s call volume was running approximately six times average around midday.

However, experienced traders know that earnings volatility (even the “good” kind) can be short-lived.

For example, TJX has made moves similar to yesterday’s—gapping higher and gaining 10% or more intraday—only 14 other times over the past 35 years (for reference, the last instance occurred on November 17, 2021).

But that historical record highlights something important. Even in the event that yesterday’s jump ends up being part of a bigger up move (which may, of course, depend largely on the broad market’s direction), the stock could give back some of its jump in the near term: One week after these moves, TJX was lower more than half the time, with an average return of -1.3%.3

Today’s numbers include (all times ET): Weekly Jobless Claims (8:30 a.m.), Existing Home Sales (10 a.m.), E-Commerce Retail Sales (10 a.m.), Leading Economic Indicators (10 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Kohl's (KSS), BJ's Wholesale Club (BJ), Eagle Materials (EXP), Ross Stores (ROST), Applied Materials (AMAT), Palo Alto Networks (PANW).

 

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1 The Wall Street Journal. Target Stock Sinks Nearly 25% on Earnings Miss, High Costs. 5/18/22.
2 Reuters. T.J. Maxx parent sees upbeat profit as price hikes counter higher costs. 5/18/22.
3 Figures reflect TJX (TJX) daily price data, 1987–2022. Supporting document available upon request

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