Consumers clearly seeking discounts and promotions, says Neuberger Berman's San Marco

Holiday Shopping Winners and Losers: An Analysis with John San Marco

Key Concepts:

• XRT (SPDR S&P Retail ETF): An exchange-traded fund tracking the retail sector, used as a benchmark for retail stock performance.
• K-Shaped Economy: A type of economic recovery where different segments of the population experience vastly different outcomes – some thriving while others struggle.
• Beta: A measure of a stock's volatility in relation to the overall market. Higher beta stocks are more volatile.
• Discretionary Goods: Non-essential items that consumers purchase when they have disposable income.
• Tariff Headwinds: Negative impacts on businesses due to imposed tariffs on imported goods.
• Earnings Discretion: The ability of a company to manage and influence its reported earnings.
• Pent-Up Demand: Accumulated demand for goods or services that has been suppressed for a period of time.

I. Recent Retail Performance & Rebounding “Left for Dead” Stocks

The retail sector, as measured by the XRT, has seen significant gains recently, with a 93% increase in the past month. Victoria’s Secret has also performed strongly, up 48% and reaching a new high last week. John San Marco of Neuberger Berman attributes this rebound to the surprising resilience of the consumer, exceeding expectations even from three months prior. Many of the stocks within the XRT were previously considered struggling, facing numerous headwinds. The improved consumer spending has benefited these “higher beta” retailers, particularly those in the mall sector. San Marco notes that many marginal competitors were vulnerable, but the buoyant consumer has provided a lift.

II. Identifying Retail Laggards & Value Plays

Despite the overall positive trend, San Marco identifies companies still offering value. He highlights Costco as a consistently strong performer. However, he specifically points to Dollar Tree and TJX as particularly promising.

• Dollar Tree: San Marco believes Dollar Tree is poised for a strong 2026. The company has overcome challenges related to the Family Dollar acquisition, management instability, and a failed expansion into multiple price points. He emphasizes the company’s strong balance sheet and the expectation that they will benefit from easing tariff headwinds and capture earnings discretion. They successfully weathered “hurricane force winds from tariffs.”
• TJX: Described as an “all-weather retailer,” TJX is well-positioned to capitalize on the spending of higher-income consumers seeking value, and to benefit from the misfortunes of other retailers. San Marco believes TJX will have a good holiday season. He notes TJX serves the consumer in a “K-shape economy” who is doing okay but looking for value.

III. Promotions, Margins, and Consumer Behavior in the Current Environment

San Marco discusses the interplay between promotions, margins, and consumer behavior. He states that retailers are utilizing the magnitude of promotions as a pricing lever to offset tariffs. However, consumers are actively seeking these promotions, effectively dictating the promotional cadence. He characterizes current consumer shopping as “intentional around promotional and events,” and describes a “coupon clipping, cautious holiday” approach. This cautious approach benefits retailers like Dollar Tree and TJX.

IV. Optimism for 2026: “Green Shoots” and Potential Reversion

San Marco expresses optimism for 2026, citing several “green shoots” indicating potential for improvement. The primary driver is the anticipated impact of tax reform, which will increase consumer spending capacity. He notes consumers stepped away from discretionary goods during COVID, but are now showing renewed interest. Additionally, tariff headwinds are expected to abate.

• Potential Comeback Stocks: San Marco specifically identifies Home Depot and Costco as potential “comeback stocks.”
  • Home Depot: He believes Home Depot is well-positioned to benefit from the tax reform, serving a middle and high-income homeowner demographic that has deferred spending in recent years, creating significant pent-up demand.
  • Costco: While acknowledging Costco’s consistently strong performance, San Marco suggests the stock has been undervalued and could see gains.

V. Data & Statistics Mentioned

• XRT Performance: Up 93% in the past month.
• Victoria’s Secret Performance: Up 48% since last month, hitting a new high last week.
• Dollar Tree: Experienced significant challenges from tariffs and internal issues but is now positioned for growth.
• Tariff Impact: Described as being “as bad as it’s going to get” currently, with expectations of easing in 2026.

VI. Notable Quotes

• “The consumer is clearly, you know, heat seeking those those big discounts.” – John San Marco, emphasizing the consumer’s focus on value.
• “I think there's some green shoots and cause for optimism about about 2026.” – John San Marco, expressing a positive outlook for the future.
• “TJX is in a great place to serve that customer who’s doing okay, but looking for for value.” – John San Marco, highlighting TJX’s target demographic.

Conclusion:

The current retail landscape is characterized by a surprising rebound in previously struggling companies, driven by a more resilient consumer than anticipated. While some retailers are thriving, others are facing challenges. Dollar Tree and TJX are highlighted as value plays with strong potential, particularly as they cater to consumers seeking discounts in a K-shaped economy. Looking ahead to 2026, tax reform and easing tariff pressures are expected to provide a boost to consumer spending and benefit companies like Home Depot and Costco. The overall sentiment suggests a cautious but optimistic outlook for the retail sector, with a continued emphasis on value and promotional strategies.