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The retail slump is an opportunity for investors to pick up shares of stocks that are benefiting even as consumer behavior trends shift, according to Citi Research. Concerns about the retail sector are mounting amid emerging signs of consumer weakness, such as rising credit card debt and thinner savings . The SPDR S & P Retail ETF (XRT) has underperformed the broader market, up nearly 10% in 2023, while the S & P 500 has a nearly 19% gain. “Sentiment is weak. Macros remain uncertain. All of this makes a directional call difficult,” Citi analyst Drew Pettit said in a note last week. “Underlying stock action has been, and is expected to remain, quite disperse, creating opportunities for stock picking and relative trades … the silver lining is that the uncertain macro backdrop, coupled with poor sentiment, sets up for alpha opportunities.” Citi named several buy-rated retailers that stand to rise, despite current macroeconomic headwinds. According to the firm’s analysts, retailers using technology to streamline their operations and improve supply chains have the most attractive growth characteristics, while those tied to e-commerce gains, luxury goods and top brands are attractive quality picks with fair valuations. Take a look at some of Citi’s favorite retail plays: Five Below is “one of the best growth stories in retail,” according to Citi, naming the discount store chain as a top pick for its solid value proposition, unit expansion plans and strong unit economics. The company is only about 45% through its goal to triple its store count to 3,500 by the end of 2030, which Citi thinks will drive roughly 20% or more annual earnings-per-share growth. Shares are up 14% for the year, and have gained 15% this quarter alone, driven by a strong holiday shopping outlook. Analysts surveyed by FactSet expect the stock could rise nearly 8 % from Wednesday’s close. “Given the uncertain macro environment, we believe FIVE will continue to take share as customers gravitate toward value-oriented retailers,” Pettit wrote in the early December note. Amazon is another beneficiary of tech-driven trends, with Citi analysts expecting the company’s retail margins to expand significantly over the next several years. “Given continued share gains, a mix-shift to consumables (aided in part from its rebuilt, faster, and more efficient regionalized fulfillment network), expanding retail margins, and greater visibility at AWS, we believe Amazon’s GAAP operating and [free cash flow] margins can expand significantly over the next several years,” Pettit said. Amazon is the largest e-commerce provider in the U.S., accounting for about 40% to 45% of total domestic e-commerce sales, Citi noted. That number is only growing as consumers turn to online shopping for convenience and value. Shares are up 72% this year but have declined 1.7% this week. Analysts polled by FactSet see nearly 22% upside from Wednesday’s close, based on consensus price targets. In the large-cap growth universe, auto parts retailers are a defensive subsector that Citi thinks could be well-positioned if there is a softening macroeconomic backdrop. O’Reilly Automotive is a top company in the sector, according to Pettit. “ORLY is widely hailed as one of the best executors across all of U.S. retail, with industry-leading parts availability enabling to them to consistently gain auto parts market share over time,” the analyst said. He added that O’Reilly is known to return cash to shareholders through share repurchases. The company on Nov. 16 increased its share repurchase program authorization amount by an additional $2 billion. Analysts polled by FactSet have a consensus price target of $1,034.33, suggesting upside of 5% over the next 12 months. Shares have jumped 16% this year. In October, O’Reilly’s management upped its full-year 2023 comparable store sales guidance and increased its new store openings target for 2024. Other buy-rated retail winners from Citi include recreational vehicle dealer Camping World , big-box retailer Walmart , HomeGoods and T.J. Maxx parent TJX Companies and discount retailer Dollar Tree . — CNBC’s Michael Bloom contributed reporting.
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