Retailers Face Taxing Start to the Year

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Investors in retail stocks can be drawn to optimism after two years of sharp growth, but that enthusiasm may quickly fade.

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Overall, those monthly child-tax-credit payments grew consumers’ wallets by an average of $16 billion a month, according to a research note from JPMorgan. That’s almost double what Americans spend monthly at electronics and appliance stores.

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At the moment, the revival of those payments hangs by a thin thread in Congress, which means retailers should be prepared for a rocky start to the year.

Last year, there was a significant drop in retail sales between April, a month after consumers received their last federal stimulus checks, and July, when monthly child-tax-credit payments began. It wasn’t a seasonal effect, either: Even in the years before the pandemic, sales tended to rise during the April-July window.

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Once those monthly child-tax-credit payments began mid-July, retail sales picked up every month thereafter. Expenses on apparel and in department stores, in particular, saw a great deal In the days immediately after the first delivery on July 15, according to Mastercard Spending Pulse.

Tax-refund season typically gives retailers a distinct uptick as consumers make unexpected spends on big-ticket items. AutoZone chief executive Bill Rhodes said in an earnings call last month that any period with tax refunds results in a “big spike” in business. This year, that’s not a sure thing.

The expanded Child Tax Credit meant that families got half of the credit they would have otherwise claimed on their 2021 tax returns in advance, so families could end up with a less-than-expected offset to their taxes.

Meanwhile, Americans’ personal savings rates had fallen to pre-pandemic levels by November.

With that in mind, the hiatus before major retailers report their results is a good time for investors to reflect on how hot the retail stock has been. The enterprise value of the S&P 500 Retailing Index as a multiplier of forward revenue is 13% higher than its five-year average.

After outperforming the S&P 500 by nearly 30 percentage points last year, both Home Depot and Lowe’s sports ventures value near 10-year highs as multiples of their respective forward sales. dollar general,

Which has a higher exposure to low-income consumers, is trading at a multiple of 28% above its five-year average.

Investors in US retail stocks are gearing up for optimism after several pleasant surprises last year, but caution is warranted. Buyers may have very little to spend as 2022 begins.

Write Jinjoo Lee at [email protected]

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