By Michael Wursthorn
Investors are warming to shares of department stores, fast-food chains and apparel retailers that have long sat in Amazon.com Inc.'s shadow in the S&P 500's consumer-discretionary sector.
Struggling retailers like Macy's Inc. and Target Corp. have invested heavily in e-commerce and revamped their stores and inventory to improve their brick-and-mortar operations. McDonald's Corp. has overhauled its low-price value menu to entice customers back to its restaurants, and Nike Inc. has focused on selling its products directly to consumers and has revamped key brands like its Jordan line of sneakers.
The yearslong turnaround efforts suggest the companies are making strides in adapting to a changing marketplace dominated by Amazon and remain viable businesses, at least for now. Investors have taken notice -- shares of Macy's have posted a double-digit increase this year after sliding in 2017, while Target and Nike are up more than 9% and McDonald's has cut its losses to 6.7%.
"Certain narratives tend to dominate stock performance longer than they should," said Kevin McCarthy, a senior research analyst with Neuberger Berman, referring to Amazon's outsize influence. "People aren't taking that granular a view of these names and what's going on."
The retail rebound has helped the consumer-discretionary sector outperform most of the other segments in the S&P 500 this year with a gain of 4.5%, versus a slide of 1.4% for the broader index. Two stocks -- Amazon and Netflix Inc. -- are responsible for a majority of that increase thanks to their respective gains of 34% and 63%. But even without their contributions, consumer-discretionary stocks are outperforming many other sectors in the index, including industrials, materials and consumer staples.
Of the companies in the sector that have reported first-quarter results, about 73% have topped analysts' expectations, according to FactSet. But some of those stocks, including Hilton Worldwide Holdings Inc. and Royal Caribbean Cruises Ltd., have suffered from a broader trend of investors not rewarding those beats with a bump in share price.
Many companies in the sector are in the midst of multiyear turnarounds to overhaul how they attract customers, focusing their effort on direct sales and on improving e-commerce. They have also gotten a boost as the global economic upswing that buoyed other corners of the market eventually filtered down to consumers' wallets.
Big hotel chains are expanding their inventory of rooms, while cruise-line operators have modernized ships and overhauled how they price fares. Investors also are betting that consumers will continue spending on experiences and luxury items, areas that Amazon hasn't been able to fully penetrate.
"Luxury is no longer equal to formality," Tiffany Chief Executive Alessandro Bogliolo said on the jeweler's earnings call. "Luxury is no longer predominantly for richer...older people. Now, luxury is meaningful to a large audience."
Shares of Tiffany have pared their decline this year to 2.2% since the company reported stronger-than-expected earnings in mid-March.
More broadly, a tight labor market, high levels of consumer confidence and a massive fiscal stimulus in the form of a $1.5 trillion tax overhaul have translated to higher spending on indulgences like designer handbags and Mediterranean cruises.
Many company executives have expressed confidence during their earnings calls that the economy remains robust and that their sales will continue growing this year.
Mark Parker, president and chief executive of Nike, told investors there is strong demand for athletic footwear and apparel in the U.S. and elsewhere. In previous years, Nike likely would have struggled to grab those customers, but the company's rejiggered operations have put it on better footing, analysts say.
"We intensified the pace and scale at which we're bringing fresh and unexpected products to consumers," Mr. Parker said on the call, referring to new products such as its Air Vapormax and Nike React shoe lines.
But some investors are still unwilling to bet big on consumers. One reason is companies across the space are coping with higher costs that are putting pressure on their profit margins.
Hanes underwear maker under Hanesbrands Inc. said Tuesday that higher raw material costs ate into its profit margins in the first quarter, even as the company topped earnings expectations. McDonald's, which also exceeded estimates, said Monday that it saw a jump in commodity costs. The same troubles plague the consumer-staples sector, which is made up of businesses that sell necessities like diapers and detergent.
And other companies like Tapestry Inc., the parent of Coach and Kate Spade, aren't seeing the same sales upswings as some of their rivals. Its shares slumped after the company reported weaker sales at Kate Spade and production delays at its Stuart Weitzman brand, cutting their year-to-date gain to 4.8%.
"I don't think we're accelerating into a new extended or higher sustainable level of growth where the consumer is going to be propelling us to this significantly higher level of growth," Brian Levitt, a senior investment strategist at OppenheimerFunds, said. "We're probably going to hit a little bit of a soft patch here in economic activity."
And while Commerce Department data shows personal spending picked up in March after a slowdown earlier this year, some analysts worry that paychecks might not go as far due to rising inflation. Others warn that the recent jump in interest rates could make it harder for some Americans to access debt, which could further limit their spending.
But despite some fears that the synchronized global growth story is slowing, analysts say it is more likely that growth is on course to peak before beginning a gradual decline over the next couple of years.
The economy is like a "big tanker," said Brent Schutte, a chief investment strategist for Northwestern Mutual Wealth Management. "It takes a big force to stop it or slow it down."
Write to Michael Wursthorn at [email protected]
Corrections & Amplifications
This item was corrected at 12:57 p.m. ET to clarify that Brent Schutte is a chief investment strategist at Northwestern Mutual Wealth Management, not chief investment officer.