Short positions, lowered guidance point to risk in consumer discretionary sector

The consumer discretionary sector continued to ring warning bells in the first quarter of 2024 even as listed companies in two other sectors, healthcare and real estate, drew attention for high or rising probability of default, according to a quarterly S&P Global Market Intelligence analysis of public sector risk.

Higher levels of apparent risk can put downward pressure on valuations, potentially drawing interest from private equity acquirers. The same factors may prompt private equity firms to delay exits from portfolio companies in risk-exposed sectors.

Signs of consumer sector risk emerged from both public exchanges, where listed consumer sector companies had, on average, the highest number of short positions on outstanding stock, and from the companies themselves. Listed consumer discretionary companies were the most likely to lower earnings expectations in corporate guidance issued between Jan. 1 and March 31.

The largest private equity entries in the consumer discretionary sector announced since Jan. 1 include two deals targeting Italian footwear companies: L Catterton Management Ltd.'s $552.37 million acquisition of a 36% stake Tod's SpA, part of a plan to take Tod's private with the company's founding family, and Style Capital Sgr SPA's $328.37 million acquisition of a majority stake in Autry International SRL

Corporate guidance

Real estate, industrials, consumer discretionary and healthcare were the four sectors to produce the most instances of updated corporate guidance in the first quarter, according to S&P Global Market Intelligence data. In most cases, companies in those sectors raised, rather than lowered, expectations for future operating results, indicating a brightening outlook.

The signal from the consumer discretionary sector was more mixed. Lowered guidance accounted for nine of 19 updates issued from public companies in the sector during the first quarter, or just under half the total, according to S&P Global Market Intelligence data.

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Chain retailer The Container Store Group Inc. was among the consumer discretionary companies that shifted expectations lower in the first three months of 2024, with CEO Satish Malhotra on a February earnings call citing a 14.8% year-over-year decline in sales for the company's just-completed quarter for its reduced full-year sales forecast. Recreational vehicle manufacturer THOR Industries Inc. also cut its sales forecast in March, pointing to "seasonally lower retail demand" as well as "cautious dealer sentiment" linked to the impact of higher interest rates on consumers.

Short interest

Bearish sentiment ran highest among investors in listed consumer discretionary businesses, according to an S&P Global Market Intelligence sector-by-sector analysis of average short interest over shares outstanding. The sector had the highest percentage of shares sold short as of mid-March at 5.43%, up from 5.12% in fourth quarter 2023 and the sector’s highest percentage in a year.

Credit risk

The healthcare sector scored highest on a measure of credit risk, according to an S&P Global Market Intelligence analysis of market signals, including stock price movements, to estimate probability of default. But that risk has now declined for two consecutive quarters, and the sector's 5.7% score in the first quarter was as low as it has been any time in the past year.

Meanwhile, the probability of default median score for listed real estate companies has trended in the opposite direction, rising for two consecutive quarters. The sector's 3.4% score in the first quarter was its highest in at least a year, representing the largest quarter-over-quarter increase of any sector.