Winners and Losers Emerge From the Retail Sector

President Trump’s tariff policy has muddied the waters for retailers this year, but nine months in, winners and losers are beginning to emerge.

First, when looking at the space, I’d lean heavily toward discount outlets, as opposed to luxury brands. 

This is the obvious conclusion to draw as the labor market is clearly weakening and inflation continues to climb. 

Consumers have proven relatively resilient so far, but they’ve also become undeniably cost-conscious. The result is a trend that favors companies that offer value over style.

For example, Lululemon (NASDAQ: LULU) — the trendy athletic apparel retailer — has been absolutely demolished.

Its stock has lost half its value this year amid threadbare earnings.

Lululemon reported second-quarter net income of $371 million, or $3.10 per share, down from  $393 million, or $3.15 per share a year ago. 

Its margins shrank, as well, and the company estimated Trump’s tariffs would cost it $240 million this year.

That led to a reduction in forward guidance, in which management cut its full-year earnings forecast to $12.77–$12.97 per share.

“We are facing yet another shift today within the industry related to tariffs and the cost of doing business,” CEO Calvin McDonald said on a call with analysts. “The increased rates and removal of the de minimis provisions have played a large part in our guidance reduction for the year.”

On the sexier side, Victoria’s Secret (NYSE: VSCO) beat on earnings that helped its share price.

However, its net income still fell 50% from last year, and its margins also tightened.

Additionally, a $100 million tariff impact was twice as high as the company’s previous estimate.

So while Victoria’s Secret stock is up 20% in the past month, I think the 40% drop it’s suffered YTD is more indicative of its future prospects. 

At the opposite end of the spectrum we have Five Below (NASDAQ: FIVE). 

I thought Five Below might come out ahead when I previewed its earnings in late August, and it did.

The bargain retailer has been able to mitigate the impact of tariffs and hold the line on prices. 

As a result, its second-quarter net sales rose 24%, to $1.03 billion, and adjusted EPS posted a notable 50% jump to $0.81.

Better still, the company raised its guidance for the third straight quarter.

Five Below now expects a 5%–7% increase in same-store sales for the full year, generating revenue of $4.44 billion–$4.52 billion.

That’s up from June’s estimate of $4.33 billion–$4.42 billion in revenue.

The company raised its adjusted EPS estimate, as well, to a range of $4.76–$5.16.

Of course, not all bargain retailers are outperforming. 

Dollar Tree (NASDAQ: DLTR) is up 30% YTD but down 12.5% in the past week after it warned that higher tariff costs would squeeze its earnings going forward. 

The company forecast a quarterly profit of $0.57 per share — far short of analysts’ expectations of $1.33.

“Tariffs remain a source of ongoing volatility, and operating in an environment where rates change frequently remains one of our largest challenges,” CEO Mike Creedon said.

Rival Dollar General (NYSE: DG) stumbled after issuing a similar warning last month and suggested it’d have to raise prices.  

Nevertheless, economic trends continue to work in both companies’ favor, as evidenced by rising revenue and earnings.

Dollar Tree’s net sales rose 12.3%, to $4.6 billion, while Dollar General posted a 5.1% increase totaling $10.7 billion.

And finally, I’d suggest Walmart (NYSE: WMT) as another promising (if obvious) retail winner.

It’s up about 12% YTD and has a ton of leverage as America’s leading grocer. 

One of its chief competitors in that space, Kroger (NYSE: KR), is up about as much. 

And both stocks are up 30% in the past year. 

It goes without saying, but if things continue to deteriorate, people will still have to eat. 

Walmart and Kroger should more than hold their own as a result.

Fight on,

Jason Simpkins

Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more… He also serves as editor of The Crow’s Nest where he analyzes investments beyond the scope of the defense sector.

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