Consumers are getting cautious - watch these retail stocks
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Wells Fargo said a definite shift in retail spending trends was observed in its latest survey of consumers.
The firm said the percentage of consumers who are stepping up hardlines spending ticked down to 83% from 94% in February. Analyst Zachary Fadem said the results suggested post-pandemic gains for hardlines, while still strong, have notably faded in recent months.
78% of consumers in the survey indicated that they have either cut back or plan to cut back on hardlines spending in response to inflation, which marked a notable increase since February.
Fadem and team said the survey results suggest the U.S. consumer still sits on solid footing, but that pressures are building with recent evidence suggesting that demand could moderate further. Discretionary categories such as furnishings, electronics, and hobbies were called the most vulnerable to lighter consumer demand. That could negatively impact retailers such as Best Buy (BBY), Wayfair (W), Bed, Bath & Beyond (BBBY), and Joann (JOAN), per the Wells Fargo analysts.
Factoring in the swing in sentiment, Wells Fargo believes investor caution and stock selection is increasingly important with the new macroeconomic backdrop. "All in, we're sticking with high quality, defensive business models, with reasonable expectations (i.e. no acceleration) and stable margins," advised the firm.
Home Depot (NYSE:HD), AutoZone (AZO), and Tractor Supply (TSCO) are seen fitting the bill to survive the consumer reset the best, while Lowe's (LOW), O'Reilly Automotive (ORLY), and Petco Health and Wellness Company (WOOF) are also seen as well positioned. Looking at the long-term, Wells Fargo sees attractive valuations for growth plays such as Floor & Decor Holdings (FND), RH (RH), and National Vision Holdings (EYE).
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