BRAVING THE STORM: WHICH RETAILERS WILL SURVIVE THE RECESSION?
by UM MASH
Though analysts are stuck debating whether the U.S. economy is actually in a recession, we are facing the textbook qualifications of one. Having just rounded out the third quarter of 2022, the market has been volatile if nothing else; many investors are contemplating how to diversify their assets safely while also potentially capitalizing on lower priced stocks. However, betting on a company in the red is always a calculated risk one takes with their portfolio.
Some have pointed to the benefit of the Lipstick effect–an economic theory that in times of social and economic hardship, people are still willing to consume higher end goods, albeit lower tier in terms of overall cost. The namesake example is that instead of buying a costly fur coat, people will still want to feel confident while somewhat frugal and shift instead to treating themselves to a higher-end lipstick. In essence, it is a downward shift in attained product price but upward trend for said product’s luxury brands.
Throughout the pandemic, many turned to online shopping to cope with the stress of quarantine as well as a sharp increase in free time and screen presence. This was especially seen in the fast-fashion market, with companies like Shein seeing a dramatic sales increase. In some ways, it was a quasi-Lipstick effect; though the product itself was not high end, often people would do large binge purchases of the clothes, racking up charges in the hundreds. These “hauls,” as they are so often called, spurred their profits.
Now, however, British fast fashion retailer Boohoo (AIM:BOO) is feeling the heat across the pond. Boohoo, which also holds other brands PrettyLittleThing and Nasty Gal, has seen a 10% drop in sales for almost a $1 billion dollar decrease from June to the end of August. The company has reported that inflation along with abnormally high returns has created this fiasco; to try and prevent further decline, Boohoo has introduced a return fee on all products. Nonetheless, the European stock market as a whole has been on a similar downward trend as the U.S. Could this be an indicator of misfortune to come?
Popular athleisure brand Lululemon (NASDAQ:LULU) has also seen a tumultuous year. The stock is down over 20%, though market analysts such as TheStreet and ResearchTeam are still suggesting to accumulate and that this will indeed blow over. Consumer discretionary stocks overall are down due to better-than-expected unemployment rates, which suggests to investors that there will be no federal policy change nor consumer relief for the foreseeable future. Inflation has hit the company with both consumers scaling back as well as increased manufacturing costs. Still, it managed to succeed throughout the pandemic by opening new locations and acquiring Mirror, an interactive fitness-based mirror brand. Though it likely won’t be in the green by 2023, EPS is expected to increase by potentially 15%.
Most consistent top-performing apparel brands such as Nike (NYSE:NKE) and Levi Strauss & Co. (NYSE:LEVI) are generally rated at Hold, and it appears that due to constant volatility in the textile sector with inflation and rising transportation costs, investors are scared to bite. Q3 earning reports are due up soon, and while that will shed some light on how to best invest heading to the end of the year, it seems that now might not be the time to gamble.
For the fledgling college investor, a stock like Lululemon might be too expensive to feasibly invest in. However, it is arguably the safest bet in this economy and has the greatest potential to be a boon in the upcoming fiscal year, as well as in long term growth. For those that cannot stomach a nearly $300 share despite this projection, though, the best investment strategy is likely to wait out this sector of consumer discretionaries until there is more resolution with inflation and the GDP.