Shares of retailers including Victoria’s Secret and Foot Locker are surging despite mixed holiday updates
4 min
Retailers are making modest predictions about the holiday shopping season—and their stocks are going gangbusters in response.
Victoria’s Secret, Foot Locker, Ulta Beauty and Dollar Tree are among the companies that offered somewhat mixed assessments of the state of the shopper last week. Yet each received an ovation from investors.
Traders have piled into stocks en masse since a softer-than-expected inflation reading on Nov. 14 bolstered wagers that the Federal Reserve is done raising interest rates and is poised to cool the economy without tipping it into a recession. Treasury yields have sharply declined as well, giving equities a second wind.
The S&P 500 has risen 4.1% since the report, extending its gains for the year to almost 20%.
Many depressed sectors of the market, such as retailers, have risen even faster. The SPDR S&P Retail exchange-traded fund—which includes 78 retailers, from department stores and other apparel companies, to automotive and drugstores—has jumped about 13%. Victoria’s Secret has soared 52%, Foot Locker is up 50%, Ulta has risen 21% and Dollar Tree has added 12%. (Three of the four stocks have suffered double-digit percentage declines this year.)
Americans slowed their spending in October, according to last week’s consumer-spending data from the Commerce Department. But the early readings from the holiday shopping season have been more encouraging. U.S. shoppers spent $38 billion during the five days from Thanksgiving through the following Monday, up 7.8% from the same period last year, according to Adobe Analytics.
Many investors closely watch consumer spending because it is a major driver of economic growth. If spending is too strong, the Fed could be forced to raise interest rates again. Whereas, if spending is too weak, it could be a sign that the economy is entering a recession.
In the coming days, investors will look at U.S. service-sector activity for November and Friday’s monthly jobs report as they try to assess the strength of the economy and the market’s trajectory.
“The consumer has been resilient throughout it all,” said Jay Woods, chief global strategist at Freedom Capital Markets. “The economic news is now starting to back that up, that, ‘OK, we aren’t going to be in a recession. Things are getting a little bit better.’ And these stocks that had been beaten-down are finally catching a bid.”
Victoria’s Secret posted its second consecutive quarterly loss Wednesday, with the lingerie retailer facing a continued slump in sales. But the company forecast higher sales in the current quarter, sending shares up 14% the next day, their largest one-day percentage gain in more than two years. The stock is down 20% in 2023.
Footwear retailer Foot Locker said Wednesday that Black Friday sales were strong and it forecast an upbeat holiday shopping period, while reporting lower sales and profit for the third quarter. Its shares rose 16% that day, their biggest gain in more than a year, trimming their 2023 decline to 21%.
Cosmetic retailer Ulta on Thursday posted stronger-than-expected sales in the third quarter and raised the lower end of its sales and profit outlook for the year. The shares rose 11% in the following session, their best day since May 2022. They are up 0.6% for the year.
Dollar Tree reported Wednesday that same-store sales growth was weaker than analysts expected, but investors appeared to be encouraged that the discount retailer is seeing increases in customer traffic, even if basket sizes are shrinking. Its shares rose 4.4% that day and are off 11% in 2023.
Another reason why retail stocks have rallied? Warehouses have reduced merchandise, and store shelves aren’t spilling over with discounted goods.
John Augustine, chief investment officer at Huntington Private Bank, said higher interest rates and oil prices made him bearish on retail stocks over the summer. But with an easing macro environment, he believes retailers could be poised to do well.
“It seems like traffic is gonna be there for the holidays,” Augustine said. “Now can retailers make the same profit, earnings per share, with tighter inventory?”
Short sellers are licking their wounds after the recent rally. They lost about $120 million in November betting against the SPDR S&P Retail ETF, according to financial-analytics firm S3 Partners. That compares with a loss of $2.8 million through the first 10 months of the year. Short sellers borrow shares and sell them, expecting to repurchase them at lower prices and collect the difference as profit.
Many retail stocks still generally look cheap compared with the broader market. Victoria’s Secret is trading at 11.8 times its projected earnings over the next 12 months, while Foot Locker is at 16.2. The S&P 500’s multiple is 18.8.
Despite the recent excitement in markets, many investors caution that it is too soon to count on a soft landing for the economy. Jamie Dimon, chief executive of JPMorgan Chase, recently cautioned that inflation could rise further and a recession isn’t off the table.
In the past 11 Fed rate-hiking cycles, recessions have typically started around two years after the Fed begins raising interest rates, according to Deutsche Bank. This hiking cycle started last March.
“It’s not an all-clear resurgence trade that we’re in right now,” said Brock Campbell, head of global research at Newton Investment Management. “This is gonna be a much more idiosyncratic stock picker’s group for a while.”
Copyright 2020, Dow Jones & Company, Inc. All Rights Reserved Worldwide. LEARN MORE
BNW Developments has established a Sydney presence, joining Arada and Sobha Realty among the growing number of UAE developers pursuing Australian buyers and development opportunities.
The Australian leather house has opened an immersive four-day pop-up in Manhattan, unveiling its Bloom Collection and redefining what a product launch can look like.
Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.
4 min
Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.
This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.
Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.
Here are three strategies useful for functional families.
It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.
But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.
If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.
To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.
In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.
If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.
Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.
The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.
Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.
However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.
These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.
But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.
Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.
The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.
Sellner doesn’t worry about his children using the funds for another purpose.
“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.
Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.
Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.
Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”
A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.
Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.
Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.
Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.
