While retail sales were flat in September, the so-called core retail sales rose last month due to substantial wage gains and savings. Moreover, core retail sales were also stronger than initially thought in August.

However, overall spending can erode as inflation shows no signs of slowing down and tighter monetary policy begins to weigh more meaningfully. “Consumer staying power may be waning, but it’s showing few signs of breaking,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina.

The relentlessly high inflation and the growing recession fear amid the Fed’s rate hikes are prompting consumers to slash discretionary spending. While investors looking to invest in the retail sector could consider buying shares of Dillard’s, Inc. (DDS) and Movado Group, Inc. (MOV), we think fundamentally weak stocks, The Gap, Inc. (GPS) and The RealReal, Inc. (REAL) could be best sold short.

Stocks to Buy:

Dillard’s, Inc. (DDS)

DDS operates retail department stores in the southeastern, southwestern, and midwestern areas of the United States. The company also engages in general contracting construction activities and owns and operates 250 Dillard’s locations.

On August 15, 2022, DDS announced the launch of Courtney Grow for its Antonio Melani brand, its latest limited-edition capsule collection. This is intended to drive fashion excitement and brand awareness and attract new clients while solidifying loyalty to Dillard’s exclusive brands.

For the fiscal second quarter ended July 30, DDS’s net sales have increased 1.2% year-over-year to $1.59 billion, while the company’s EPS came in at $9.30, an increase of 5.6% year-over-year.

For the fiscal year ending January 2023, analysts expect DDS’s revenue to increase 1.9% year-over-year to $6.75 billion. Moreover, the company surpassed the consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.

Over the past three months, the stock has gained 48.2% to close the last trading session at $321.27.

DDS’s strong fundamentals are reflected in its POWR Ratings. DDS has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

DDS has an A grade for Quality and a B for Value. It is ranked #10 out of 66 stocks in the Fashion & Luxury industry.

We have also given DDS grades for Sentiment, Momentum, Growth, and Stability. Get all DDS ratings here.

Movado Group, Inc. (MOV)

MOV designs, sources, markets, and distributes watches worldwide and provides after-sales and shipping services. The company operates in two segments: Watch and Accessory Brands and Company Stores.

For the fiscal second quarter ended July 31, net sales increased 5.1% year-over-year to $182.80 million. MOV’s gross profit increased 8.6% year-over-year to $106.93 million.

In addition, non-GAAP net income attributable to MOV increased 22.4% from the year-ago value to $24.58 million. The company’s non-GAAP EPS came in at $1.07, indicating an increase of 25.9% year-over-year.

Analysts expect MOV’s EPS to increase 7.4% year-over-year to $4.23 for the fiscal year ending January 2023. The consensus revenue estimate of $789.10 million for the same period indicates a 7.7% year-over-year increase. In addition, it has topped the consensus EPS estimates in each of the trailing four quarters.

Over the past month, the stock has gained 16.5% to close the last trading session at $32.94.

MOV’s POWR Ratings reflect the promising outlook. The company has an overall rating of B, which translates to Buy in our proprietary rating system.

MOV is also rated an A in Quality and a B in Value. Within the Fashion & Luxury industry, it is ranked #3.

To see additional POWR Ratings for Sentiment, Stability, Growth, and Momentum for MOV, click here.

Stocks to Avoid:

The Gap, Inc. (GPS)

GPS operates as an apparel retail company, offering apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands.

In the second quarter ended July 30, net sales declined 8.4% year-over-year to $3.86 billion. The company’s operating loss came in at $28 million, compared to an operating income of $409 million a year ago. Non-GAAP net income declined substantially from the prior-year quarter to $30 million. In addition, its adjusted EPS decreased 88.6% year-over-year to $0.08.

For the fiscal third quarter ending October 2022, analysts expect GPS’ revenue to decline 3.2% year-over-year to $3.82 billion. Also, its revenue is expected to decline 6.1% year-over-year to $15.65 billion in the fiscal year ending January 2023, while its EPS is expected to remain negative.

The stock has declined 13.4% over the past six months to close its last trading session at $10.83. It is down 38.6% year-to-date.

This bleak outlook is reflected in GPS’ POWR Ratings. The company has an overall D rating, which translates to a Sell in our proprietary rating system.

GPS is rated a D for Stability. In the Fashion & Luxury industry, it is ranked #59.

Click here to see additional POWR Ratings of Growth, Value, Sentiment, Quality, and Momentum for GPS.

The RealReal, Inc. (REAL)

REAL operates a global online marketplace for consigned luxury goods and sells various product categories, including women’s, men’s, kids’, jewelry and watches, and home and art products.

For the fiscal quarter ended June 30, loss from operations amounted to $50.98 million, while its adjusted EBITDA amounted to a negative $28.81 million. Non-GAAP net loss attributable to common stockholders per share stood at $0.40.

REAL’s trailing-12-month ROE and ROA of negative 932.74% and 33.92% are significantly lower than the industry averages of 14.76% and 5.21%, respectively. Its trailing-12-month levered FCF margin of negative 18.03% compared with the industry average of 1.59%.

The stock has declined 85.9% year-to-date to close the last trading session at $1.64.

The poor fundamentals of REAL are reflected in its POWR Ratings. The stock has an overall rating of D, which translates to a Sell in our proprietary rating system.

The company has a D grade for Stability. Within the Fashion & Luxury industry, it is ranked #63.

Get the additional POWR Ratings of REAL for Momentum, Value, Sentiment, Growth, and Quality here.

DDS shares were trading at $318.51 per share on Thursday afternoon, down $2.76 (-0.86%). Year-to-date, DDS has gained 30.29%, versus a -18.98% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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