Excessive Consumer Spending Is Over! 3 Retail Stocks to Sell

While the U.S. economy has proved surprisingly resilient in 2023, the majority of economists are still calling for a recession in the next 12 months. Meanwhile, the Conference Board’s consumer confidence index hit a six-month low last month. Although the macroeconomic picture can best be described as murky, consumer discretionary stocks have been the third-best performing S&P 500 sector of 2o23, after technology and communication services. That makes now a good time to consider whether some names have gotten too far ahead of themselves and should be added to your list of retail stocks to sell.

While retail sales surprised by increasing 0.3% month over month in May, numerous reports point to a need for caution. According to Deloitte’s State of the Consumer Tracker, Americans plan to spend less and save more. And while Bank of America notes that consumer spending stabilized in May, it points out that younger consumers are grappling with higher housing costs and the likely restart of student loan payments.

Consumer spending may not nosedive. Yet, still-elevated inflation and a softening labor market are likely to weigh on discretionary spending going forward. At a minimum, the American consumer will remain conservative with their spending until a clearer economic picture emerges.

Amid this challenging backdrop, here are three retail stocks to sell.

Booking Holdings (BKNG)

Spending on travel has proved surprisingly strong over the past year, even as consumers look to rein in spending. This has led to a rally in many travel stocks, including Booking Holdings (NASDAQ:BKNG). Shares of the online travel agency are up 36% in the past 12 months, doubling the broader market’s gain.

In fairness, the company knocked it out of the park with its first-quarter results. Booking Holdings’ booked room nights jumped 38.3% year over year, while overall gross bookings surged 44.5% on a reported basis and 52% when accounting for currency fluctuations. The company beat on both the top and bottom lines, with a 47% year-over-year jump in revenue on a constant-currency basis and earnings of $11.60 per share, up from $3.90 a share in the first quarter of 2022.

Yet, the company’s growth is forecast to slow, with analysts calling for revenue to increase 20.6% this year and 11.3% next year, down from 56% in 2022. Earnings are expected to follow a similar trajectory, increasing 37.5% this year but only 18% next year, after rising 171% last year.

Given the expected slowdown in growth and the fact that BKNG stock is basically flat over the past three and a half months, it may be time to put this one on your list of retail stocks to sell.

Shares look overvalued here, trading at 24.4 times earnings, compared with a sector median of 12.5. Moreover, while the majority of analysts rate the stock a “buy,” their average price target of $2,781.57 is just 5% above the current share price. Ultimately, there appears to be more downside risk in BKNG stock than upside potential, especially if a darkening economic picture causes spending on travel to weaken.

Target (TGT)

It’s been a bumpy ride for Target (NYSE:TGT) shareholders. The former pandemic darling has underperformed the market and the retail sector over the past 12 months and on a year-to-date basis.

Growth rates have slowed dramatically, with discretionary categories such as home goods and apparel contributing significantly to the slowdown. While sales of routine items such as food, beverages and household essentials remain solid, it hasn’t been enough to offset the slump in other areas.

Consequently, in the first quarter, Target witnessed just a 0.7% increase in comparable store sales. Meanwhile, Q1 revenue increased by just 0.5% from a year ago and adjusted earnings per share (EPS) of $2.05 were down 6.2% on a year-over-year basis.

“Inventory shrink,” or the loss of inventory not due to sales, continues to be a concern for the company, with management expecting the issue to reduce 2023’s profits by an additional $500 million compared with 2022. Between inventory shrink, a rise in “violent” incidents, and boycotts, Target seems to be facing a number of formidable headwinds in addition to broader economic woes.

It’s best to stay away or put it on your list of retail stocks to sell.

eBay (EBAY)

E-commerce company eBay (NASDAQ:EBAY) finds itself in a remarkably tough situation. As the platform’s relevance wanes, investors are concerned about the company’s future growth potential. Meanwhile, the stock has underperformed in the short and long term, and the lingering scent of a value trap is in the air.

The company’s future trajectory lies in its gross merchandise volume (GMV) and whether the management can successfully revive the platform’s appeal amid rising expenses, weakening consumer confidence and cutthroat competition.

For the first quarter, eBay saw a modest 1% uptick in sales, a silver lining that barely blunts the impact of a 4% dip in net income. It’s clear the firm’s weakening operations and stagnant sales are chomping away at its bottom line.

Looking ahead, eBay’s forecast for the second quarter paints a similar picture of flat revenue, signaling a need for a deft turnaround strategy to stem the tide.

Of the 17 analysts who cover EBAY stock, only six rate it a “buy,” with nine “holds” and two “sells.” I will add my rating to the “sell” category.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.

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