October 26, 2020 BARRON’S 11
STREETWISE
Consider dumping department store stocksby
Thanksgiving because shopping trends might look
good around then, but will be much worse later.
Holiday Shopping
Could Start Early,
But Trouble’s in Store
S
anta’s not a smoker, as
farasIknow.Buthe’s
old, and his belly
shakes when he laughs
“like a bowl full of
jelly,” according to one
poem. Those are risk
factors for Covid-19, so I suppose it
was inevitable thatMacy’ssaid this
past week that the bearded gift-giver
wouldn’t sit with children at any of its
stores for the first time in 159 years.
That’s as good a signal as any for
investors who own shares of retailers
to contemplate the spending implica-
tions of a socially distant Christmas. If
a new forecast from UBS has it right,
things will look jolly at first, until they
don’t, which might provide a selling
opportunity inNovember.
The good news: Retail sales picked
up smartly in September, the latest
reported month. Joblessness remains
high, but many who are working have
money to spend, after months of for-
going family trips and meals out.
The National Retail Federation says
it is “cautiously optimistic” about
fourth-quarter sales, which is like a
cheerleading squad that gets the
crowd chanting m-a-y-b-e. But UBS
analyst Jay Sole published a report
this past week predicting that U.S.
holiday sales will fall 10% to 12% year
over year. If that’s right, depressed
store stocks could have further to slide
later this year.
The prediction refers specifically to
so-called softline goods, like clothing
and accessories, not hardlines, like
electronics and appliances. It’s based
in part on surveys of U.S. shopper
intentions. This year, 41% said the
economy would affect their holiday
spending versus 28% last year. That’s
the biggest change since the global
financial crisis more than a decade
ago. The numbers suggest big shifts
toward online shopping and away
from department stores, and with
fewer customers paying online and
then picking goods up in stores.
There is a sharp increase in the
number of shoppers who say they will
start their holiday shopping by Nov. 1.
“Our guess is this demand ‘pull-for-
ward’ will cause early holiday season
reads to look good,” Sole writes.
“However, we think once retailers
start to lap big shopping weeks near
Thanksgiving, real-time indicators
will weaken, causing stocks to react
negatively.” Sole is most bearish on
department stores Macy’s (ticker: M),
Nordstrom(JWN), andKohl’s(KSS).
But he’s bullish on brands that can “go
it alone” without department stores,
likeLevi Strauss(LEVI),Nike
(NKE), andSkechers USA(SKX).
There are a few big unknowns. The
U.S. is experiencing a third major
surge in Covid-19 cases, hospitaliza-
tions, and deaths. If that trend contin-
ues through Christmas, then, well, on
Donner, on Blitzen, we’re all in deep
you-know-whatzen. Also, part of a
summer lift in consumer spending
was owed to government stimulus
programs to help the needy and sup-
port the economy.
We are likely to get more stimulus
after the Nov. 3 election, once political
calculations subside, because there are
no deficit hawks left in Washington,
D.C., says David Kelly, chief global
strategist at J.P. Morgan Asset Man-
agement. “The species has died,” he
says. “The 2017 Tax Act proved that
you couldn’t call the Republicans ex-
actly deficit hawks. And I certainly
don’t think you could characterize
[House Speaker] Nancy Pelosi as a
deficit hawk.” But Kelly also says that
if Congress remains split, stimulus
could take longer to pass.
FiveThirtyEight, an election fore-
caster, puts Joe Biden’s chances of
winning the presidency at 87%. Polls
schmolls, some say, given how wrong
they were in 2016, but FiveThirty-
Eight back then gave Donald Trump a
30% chance of winning, higher than
most did. Its models now suggest that
even assuming a 2016-size surprise,
Biden is favored. Democrats have a
74% chance of taking the Senate, the
site says. I don’t mention this as an
open call for misdirected partisan
rage-mail, or because I think elections
are a good predictor of stock returns.
There are some policy plans that
could factor into the subject at hand.
Biden says he wants to raise the
top tax rate on high earners to 39.6%
from 37% to help pay for new pro-
grams like a public option for health
care. For those making over $1 million
a year, he would like capital gains to
be taxed as income, rather than at
special, low rates of 20% or less. And
he wants to eliminate something
called the step-up basis in capital
gains, whereby investors can avoid
taxes on appreciated stock by dying—I
don’t recommend that strategy as a
first resort.
If Biden prevails, and the Dems
sweep, wealthy investors might be
tempted to take gains in highfliers by
year’s end. And if they sell winners,
they might want to cash in some
stinkers, too, as an offset. Tax-loss
selling is often done only grudgingly,
near year’s end. Do you see where I’m
going here? Macy’s is down 56% so far
this year; Nordstrom, 65%; and Kohl’s,
52%. Consider dumping shares of
struggling retailers like these by
Thanksgiving if you expect a year-end
rush for tax selling, and because if
UBS’s Sole is right, shopping trends
might look good around then but will
be much worse later.
Q
uick follow-ups: Two
weeks ago I mentioned
taking aLabCorp(LH)
mail-in Covid-19 test, and
some of you were kind
enough to ask how it went. It was
speedy and negative, thanks. The
stock has tacked on another 5% since
that column, or 2.5% for each nostril,
and is now up 22% for the year.
Last week, I wrote about the wide
disagreement on Wall Street over how
many iPhonesApple(AAPL) will sell
this year. Consider guessing high. I
ordered two this past week, because
after factoring in subsidies of $850 per
phone fromT-Mobile US(TMUS),
and a lower cost for service compared
with my current carrier, the phones
were about free. Piper Sandler analyst
Harsh Kumar ran a survey last De-
cember suggesting high interest in
upgrades, and another one weeks ago
suggesting low interest. But once he
saw the subsidies, he set the surveys
aside and raised his forecast for the
quarter ending December to 73 mil-
lion phones from 65 million.B
email: [email protected]
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