I've written multiple columns over the past few years, on the changes in the allocation of investment capital within specific sectors. I've considered the outperformance of consumer staples vs. discretionary stocks, the outperformance of the stocks of companies whose main consumer base is males vs. those whose main base is females, and the comparative performance of discount, mid-tier, and high-end grocers.
One of the commonalities between all of these observations is that they are based on macroeconomic trends, and are occurring at the same time that the general market meme has been that macro issues are not important to traders.
None of the shifts have been as dramatic as the shift in the branded and unbranded retailers. About three months ago, I wrote about the trend of consumers moving away from branded apparel in the column. I listed a series of stocks that should benefit from the shift, and another group that would be harmed by it.
In this column, I'll review the respective performance of each group since then, and discuss briefly what the immediate future potential for each is.
The group of branded retailers included 12 companies: Abercrombie & Fitch (ANF), L Brands (LB), Aeropostale (ARO), American Eagle Outfitters (AEO), Express (EXPR), The Gap (GPS), Ascena Retail Group (ASNA), Urban Outfitters (URBN), Chico's FAS (CHS), ANN INC. (ANN), Ralph Lauren (RL) and PVH (PVH).
The group of retailers with a focus on unbranded apparel included 7 companies: TJX (TJX), Ross Stores (ROST), Burlington Stores (BURL), Costco (COST), Target (TGT), Walmart (WMT), and Amazon.com (AMZN).
In the past three months, the stocks of the 12 branded retailers has been: Abercrombie -33%, L Brands +28%, Aeropostale -44%, American Eagle -2.5%, Express -24%, Gap -10%, Ascena -29%, Urban Outfitters -21%, Chico's -1%, ANN, -17%, Ralph Lauren +6%, and PVH -4%.
In the same period of time, the performance of the seven unbranded apparel retailers has been: TJX +7%, Ross +18%, Burlington +21%, Costco +12%, Target +19%, Wal-Mart +9%, and Amazon -9%.
The outright dichotomy of the respective aggregate performances of the two groups in such a short period of time is stunning. Discussing the performance of the outliers in each group, L Brands and Amazon, is not something I'll address in this column.
Although the performance of each group over the past three months is indicative of what appear to be secular shifts in consumer trends that were evident, when I wrote the last column in August. They have not been perfectly aligned since.
The negative trajectory for the branded issues, which was already evident earlier in the year, generally continued its course over the past three months, heading into the holiday season. The positive performance of the unbranded issues, although also evident earlier, shows a marked increase over the past few weeks.
This is probably due to end of year window dressing by mutual funds and ETF's wanting to show that they are holding winners at year-end for marketing purposes early next year.
I would be cautious on expecting the aggressive performance of the past six months or so, for both groups, continuing in the immediate future. However, there may not be a change until after January.
During January, a reversal of the aggressive moves for both is probable. This is because of how large the moves have been for both issues, over the past year, and increasingly so over the past few quarters.
From a speculators' and traders' perspective, preparing to go against the trend of the past few months is probably wise, although I would not suggest doing so yet. From an investor's perspective, if you've held the unbranded issues, I would suggest continuing to do so. The macroeconomic, social, and demographic trends are still very much in support of the shift in consumer attitudes I had mentioned earlier.
Be prepared to accept a near-term reversal of the aggressive positive performance of the unbranded issues over the next calendar quarter.
Beyond an immediate correction driven by profit taking, and perhaps a shift into the branded issues by fund managers simply because of the gross comparative underperformance of those issues recently, retail consumption growth, which has been stagnant for the past few years, is shaping up to be poor again this holiday season.
The discount retailers have comparatively little pricing power versus the branded retailers, which can, and I expect will, attract consumers with deep year-end and January discounts.
