The discretionary consumer goods sector has risen sharply recently.$SPDR non-essential consumer ETF (XLY.US) $Rose nearly 20%, and retail stocks were the main beneficiaries of the rapidly optimistic market sentiment.

However, Morgan Stanley analyst Simeon Gutman predicted a number of retail stocks' results in the second quarter and the second half of the year in a report, saying the rebound may be short-lived. He believes that about half of the companies he covers have lowered their guidance this year. Although they have taken steps in advance to dampen expectations, more downward revisions are "almost inevitable" in the earnings week.

Gutman says there are only one-dollar stores and$The Home Depot Inc (HD.US) $A few companies will be in better shape in the second quarter, while others are likely to lower their guidance.

So, he kept the right$American Dole (DG.US) $、$Walmart Inc (WMT.US) $、$car zone (AZO.US) $和$Driven Brands (DRVN.US) $The "buy" rating. On the contrary, he is interested in$Target Corp (TGT.US) $、Best Buy (BBY.US) $、$Williams-Sonoma (WSM.US) $Stocks, such as those that prefer non-essential consumption, are cautious.

Expenditure on non-essential consumer goods will decline

"We estimate that spending on non-essential consumer goods per household will fall 8.5% year-on-year in the second half of 2022, mainly in the durable goods category," Gutman said. The shift in category mix is putting pressure on profit margins, with essential consumer goods accounting for more spending. "

He added that the price reduction promotion was likely to continue and accelerate, which could exceed market expectations for non-essential consumer retail stocks. While companies may make upbeat comments, original inventory levels are likely to remain high. Given the general decline in consumer spending, clearing inventories could be a big problem.

According to Gutman, one of the few non-essential consumer retail stocks expected to remain resilient is DKS.US. Despite news that the company's earnings may be lower than expected, Gutman has confidence in it.

Comparison of retail stocks

Other companies that are about to announce results include highly competitive companies, such as$car zone (AZO.US) $、$Advance Auto Parts (AAP.US) $、$The Home Depot Inc (HD.US) $、$Lowe's Companies Inc (LOW.US) $, and$Dollar Tree Company (DLTR.US) $、$American Dole (DG.US) $。

For Lowe's Companies Inc and The Home Depot Inc, Gutman said his attitude towards Lowe's Companies Inc has changed in recent years. Adverse housing indicators, still high expectations and lower exposure are all negative factors facing Lowe's Companies Inc, he said.

As for dollar stores, Gutman is not optimistic about the outlook for Dollar Tree due to expectations of a slowdown in sales and potential resistance from consumers to rising prices. In addition, the company has additional enforcement risks in reviving the Family Dollar franchise.

In the field of auto parts, the auto zone is a key company and is more popular than Advance Auto Parts. Advance Auto Parts has reaped the benefits of inflation through its accounting structure, and investors will be more cautious about the stock if inflation peaks in the summer.

Finally, Walmart Inc is better than Target Corp because Walmart Inc has a higher proportion of essential consumer goods and a larger grocery market share.

"the key debate is whether Target Corp's guidance has completely eliminated the risk," Gutman said. Given inflation and the shift to necessities, two additional headwinds are likely to be a shift in sales growth in the second half of the year and an adverse profit margin mix. We believe that these concerns are justified, which is a key reason why we are not optimistic about the stock. "

However, there is a clear divergence of views on Target Corp on Wall Street. Wells Fargo & Co believes that the stock will be oversold in the second half of 2022, providing a long-term opportunity for investors looking to buy. UBS is more optimistic that there may be a buying opportunity now.

UBS is also bullish on Walmart Inc, pointing out that its groceries and technical prowess can help it cope with inflation and inventory problems.