Two Retail Stocks to Watch Ahead of Their Earnings Reports This Week

People wear protective face masks outside Best Buy in Union Square as the city continues Phase 4 of re-opening following restrictions imposed to slow the spread of coronavirus on September 24, 2020 in New York City.
Noam Galai | Getty Images

Retail earnings are ramping up this week.

Urban Outfitters reports on Monday, a day before Best Buy, Dick's Sporting Goods, Abercrombie and Fitch, Dollar Tree, Nordstrom, Gap and American Eagle Outfitters.

All of their stocks are in the green year to date except for Nordstrom, which is down almost 48%. Gap has been this group's biggest gainer, up over 41%.

With October retail sales missing expectations and a somewhat unpredictable holiday season around the corner, traders are on the lookout for anything that might indicate how the end-of-year spending story might play out for retailers.

"The first name I'm going to be watching is Best Buy and the second name we're going to be watching is Dollar Tree," Craig Johnson, senior technical research analyst at Piper Sandler, told CNBC's "Trading Nation" on Friday.

He pointed out that October's same-store sales numbers showed notable weakness in the clothing, food and drink and gasoline station categories.

"When you look at this chart of Best Buy, it's in a very nicely established upper-trending price channel and all we've seen as of late is just a nice little sideways consolidation, but the primary trend is still higher," Johnson said.

"I'd still be buying that stock heading into the earnings print here and I see a nice sort of implied option move in this name, too, about 7%," he said. "So, I think that's one that should be bought."

Dollar Tree, however, looked to be in a more precarious position, he said.

"Dollar Tree doesn't have a real meaningful online presence, and they also are going to have some challenges importing goods from China and Asia given the fact that they've got a lot of imported goods coming in and shipping rates are going dramatically higher," he said, pointing to the chart.

"We've been making this kind of broadening pattern — higher highs and lower lows — here, and when I see that kind of price action, I get a little bit more cautious," Johnson said. "I think you could probably get a decent move to the downside in that stock, down toward, perhaps, the low 80s as I look at the chart on that."

Dollar Tree shares closed less than half of 1% higher on Friday at $94.97. Best Buy was also up a fraction of a percent at $119.14 a share.

Consumer spending will likely take "longer than the market thinks" to come back in earnest, Boris Schlossberg, managing director of FX strategy at BK Asset Management, said in the same "Trading Nation" interview.

"The market at this point has kind of priced in the perfect scenario, but as far as retail goes, we now have this very, very unfortunate circumstance of peak Covid cases right at the time of peak shopping holiday season," Schlossberg said.

"It's going to be much more challenging for a lot of the bricks-and-mortar retailers, a lot of whom still depend on that shopping experience — the idea of ... basically being able to just do impulsive buying when you're in a physical store, which is where a lot of their additional sales come in," he said.

With new lockdowns taking effect across the country, retail's near-term prospects look bleak, Schlossberg said.

"I think a huge amount of shoppers are going to stay away from brick and mortar," he said. "To me, the picture is much … grimmer in the immediate future than the market thinks, and I think that's the problem. I think a lot of these big names are kind of overbought at this point. I would not be buying them and chasing them at this level."

Disclosure: Piper Sandler is a registered market maker for Best Buy.

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