U.S. retailers revealed rising sales in their latest quarterly report cards, reflecting robust consumer spending in a healthy economy ahead of the traditional holiday shopping season, but retail stocks and sector-related exchange traded funds remain unimpressed.
On Tuesday, the SPDR S&P Retail ETF (NYSEArca: XRT) fell 2.9% and VanEck Vectors Retail ETF (NYSEArca: RTH) declined 3.5%.
A healthy economy with a tight labor market, unemployment levels near half-century lows and wage growth have strengthened consumer confidence, allowing American consumers to be more liberal in their discretionary purchases.
However, retail profits remain under pressure from increased online competition, along with higher spending on worker wages, shipping costs and the recent tariffs on Chinese-made goods, the Wall Street Journal reports.
Target (NYSE: TGT) revealed increased shopping demand for a range of goods and reported a 5.1% rise in comparable sales in the third quarter for the same period year-over-year, including a 49% jump in digital sales.
“We continue to benefit from a very healthy consumer and macroeconomic backdrop,” Target CEO Brian Cornell said on a conference call Tuesday, adding the company’s investments have helped it capture business from competitors that are closing stores or liquidating.
However, profit margins shrunk in the latest quarter at Target as the company incurred greater costs from its supply chain and wages.
TGT shares plunged 10% mid-Tuesday, breaking below its long-term trend line at the 200-day simple moving average.
Related: Strong Consumer Spending Isn’t Enough for Retail ETFs
Some analysts, though, believe that this is a necessary growing pain as retailers try to revamp their business model and improve scale.
“Some on Wall Street may lament the dip, but the truth is you cannot reinvent a retailer on the cheap,” Neil Saunders, managing director of GlobalData Retail, wrote in a note.
Meanwhile, Kohl’s (NYSE: KSS) revealed a 2.5% advance in comparable sales for the latest quarter, pointing to demand for apparel. The department store chain’s margins also slightly improved from a year earlier, but sales growth slowed. The retailer remains optimistic heading into the holiday season.
“I feel really good about where the customer is today,” Kohl’s CEO Michelle Gass said on a conference call. “There is no reason to believe that will change as we head into the holidays.”
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