2 min read.Updated: 11 Jan 2022, 06:21 PM ISTJINJOO LEE, The Wall Street Journal
Investors in retail stocks might be primed for optimism after two years of heady growth, but that giddiness could wear down quickly
The Grinch didn’t steal Americans’ Christmas, but he might make a late appearance.
Expanded child tax credits, which provided a reliable boost to Americans’ wallets on the 15th of every month, ended a month ago. Those payments, which expanded both the size and eligibility of child tax credits, provided up to $300 per child a month, reviving retail sales that had slowed after Americans stopped receiving stimulus checks.
In total, those monthly child-tax-credit payments boosted consumers’ wallets by a collective $16 billion a month on average, according to a research note from J.P. Morgan. That is roughly double what Americans spend on electronics and in appliances stores monthly.
At the moment, a revival of those payments hangs by a thin thread in Congress, meaning retailers should brace for a rocky start to the year.
Last year, there was a noticeable drop in retail sales between April, a month after consumers received their last federal stimulus checks, and July, when monthly child-tax-credit payments kicked in. It wasn’t a seasonal effect, either: Even in years preceding the pandemic, sales tended to rise during the April-July window.
Once those monthly child-tax-credit payments kicked in starting mid-July, retail sales picked up every month thereafter. Spending on apparel and in department stores, in particular, saw a big uptick in the days immediately following the first distribution on July 15, according to Mastercard SpendingPulse.
Tax-refund season typically gives retailers a separate uplift because consumers tend to spend the windfall on big-ticket items. AutoZone Chief Executive Officer Bill Rhodes said in an earnings call last month that any period with a tax refund resulted in a “big spike" in business. This year, that isn’t a sure thing.
The expanded child tax credits meant that families got half of the credits they would have otherwise claimed on their 2021 tax return in advance, so households might end up with a smaller offset to their taxes than they expected.
Meanwhile, Americans’ personal savings rate had dropped to pre-pandemic levels by November.
With that in mind, the interlude before major retailers report their results is a good time for investors to ponder just how hot retail stocks have been. The S&P 500 retailing index’s enterprise value as a multiple of forward revenue is 13% higher than its five-year average.
After outperforming the S&P 500 by roughly 30 percentage points last year, both Home Depot and Lowe’s sport enterprise values as multiples of their respective forward sales near 10-year highs. Dollar General, which has higher exposure to low-income consumers, is trading at a multiple that is 28% above its five-year average.
Investors in U.S. retail stocks are primed for optimism after a string of pleasant surprises last year, but caution is warranted now. Shoppers might have a lot less to spend as 2022 kicks off.