While there is a lot of back and forth among politicos and politically aligned economists around the definition of a recession and whether the United States is currently in one, we think it’s best to ignore the noise and instead focus on recession-proofing portfolios and portfolio holdings. One of the areas of the economy already starting to show signs of the American consumer straining under the weight of higher inflation is the retail sector. We have already seen teen retailers disappoint, think Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEO), and everyone remembers the Target (TGT) fiasco that still seems to be playing out, so we think that even for the casual market follower, it is quite obvious that something is happening within the retail space.
So What Should Investors Do?
We think that investors, especially those who have to have exposure to retail, should focus on companies who have solid balance sheets, are generating cash today and have a decent amount of cash on hand with little to no debt. To be clear, when we discuss debt, we are referring to it in the traditional sense, not the new form of accounting which takes into account a company’s lease obligations. While the lease obligation line item can give you insight into the future annual costs of maintaining a business’s physical footprint, we think it clouds the picture on a company’s ability to navigate a recession.
The fact is that clothing stores are out. Retailers geared towards the teen crowd or trendy approachable fashion should be avoided. Instead, investors should focus on retailers with a niche that has minimal downside and can create cash flow during a rough period economically.
Haverty Fits The Bill
One name in the retail space