as second quarter 2022 earnings season wraps up this week has proven to be an important one for the retail sector first investors got the chance to hear from some of the top retailers such as walmart wmt target tgt home depot hd and lowe’s low next us national retail sales for july were released the data points to a confusing environment where some segments of the us consumer are under pressure but others are holding up surprisingly well despite a slowing economy while elements of a “k” shaped economy are evident with high end consumers still spending strongly and lowend consumers pulling back overall expenditures have been better than wall street feared for july retail spending ex automobile sales and gasoline rose 07 versus expectations of 04 overall though inflation has been a headwind for the us consumer in 2022 this has caused many people to feel squeezed as overall wage growth has lagged inflation despite a tight labor market as seen on the chart below this has resulted in a sharp drop in consumer confidence one of the effects of this drop in consumer confidence is that low wage earners have been forced to concentrate their spending on essentials as well as trade down in terms of price points wmt a good proxy for overall consumer spending noted this in its most recent quarter reported this week stating that consumers felt squeezed and were purchasing less higher profit discretionary items and instead focusing on basics for example households earning under 100000 a year appeared to drive doubledigit growth in wmt’s food categories as a result the company reported sales growth of over 8 in the quarter this might have been aided by the recent move of oil prices back below the 90 per barrel level all of this led wmt to forecast 3 same store sales growth in the back half of the year while wmt’s technicals have improved in the short term we believe that wmt will continue to underperform versus the sp 500 in its most recent quarter target reported weaker than expected results they noted that margins were impacted because of aggressive adjustments to reduce inventory levels lower than expected sales in discretionary categories and higher shipping costs both target’s ceo and cfo are hopeful that they are past the excessive inventory issues and are hopeful for the rest of the year on the other hand we remain cautious on target’s stock and believe that it should be avoided tgt’s price action looks weak shows a lot of heavy selling and should continue to lag the market for the rest of the year most retail sector stocks have been mixed this year with many stocks experiencing significant technical damage as a result most retail stocks will not form classic william o’neil bases for three to six months despite this we believe that there are some pockets of strength that are actionable and have strong fundamentals specifically there are three areas we would encourage investors to focus on given the uncertainty of the us economy given the previously mentioned squeeze on the pocketbooks of the bottom half of americans we continue to favor us retail discounters if the us economy was to enter a more pronounced downturn these retailers should perform better on a relative basis versus most areas of consumer cyclical and discretionary for example in the great financial crisis gfc us retail discounters were able to outperform the sp 500 in 2008 chart 2 us retail discounters vs the sp 500 during the financial crisis 20072010 two discount retailers that have been performing well on a relative strength basis are dollar tree dltr and dollar general dg dollar tree dltr 38b market cap dollar tree is a leading operator of discount variety stores in north america the company operates 162k stores across 48 contiguous states and five canadian provinces supported by a coasttocoast logistics network it is likely to be a relative winner in the near term given the specter of continued high inflation rates in the us as a valueoriented retailer with pricing power and indeed with a newly revamped management team we expect the stock to outperform the stock’s strong and robust technical ratings reflect leadership it has a relative strength rs rating of 97 and an accumulationdistribution ad rating of b the o’neil industry group rank steadily improved to 13 from 99 over the past eight weeks dollar general dg 58b market cap dollar general is a usbased discount retailer operating 18130 stores across 46 states making it the largest retailer in the country by store count the company employs an every day low price edlp strategy its products are typically priced at a 20–40 discount to mainstream retailers as discretionary spending power reduces in the upcoming quarters dollar general’s offerings will resonate more with the us consumers and drive sales the stock has broken out of a stageone eightweek long cupwithhandle base and is currently trading 6 above the pivot it has a robust fundamental profile eps rank of 80 smr rating of c and composite rating of 89 technical ratings are also solid rs rating of 91 ad rating of c and updown volume ratio of 14x another area where consumers are being forced to make changes is with new and used cars this has been driven by three factors first supply chain issues continue to plague the auto manufacturing industry this has resulted in fewer new cars available on dealer lots next this has driven new car prices up to record highs with many selling at premiums to msrp finally this lack of supply and higher prices has resulted in higher used car prices while these prices have begun to pull back recently they are still up markedly since the start of the pandemic as shown in the chart below chart 3 us consumer price index for new and used vehicles with the rising prices of new and used vehicles consumers have been forced to keep their current vehicle and maintain it this has greatly aided automobile parts retailers as a result the industry has had strong stock performance versus the broad market chart 4 us auto parts retailers have outperformed the sp 500 ytd one such company that we believe is well positioned to continue to benefit from this trend is o’reilly automotive orly o reilly automotive orly 47b market cap o’reilly automotive is a specialty retailer of automotive aftermarket parts tools supplies equipment and accessories in the us and mexico the company sells its products to both diy 59 of sales and professional 41 of sales customers the company operates 58k stores in 47 us states and 25 stores in mexico over the past five years sales have grown at a 9 cagr while eps has grown at a 24 cagr driven by store rollout and highsingledigit comparable growth in the long term we believe o’reilly can get to 67k stores and deliver abovemarket rates of comparable growth given its competitive advantages the stock is forming the right side of a stageone cup base pivot at 749 and has strong oneil ratings and rankings it has eps rank 88 a composite rating of 95 a sales margin ratio rating of a and an rs rating of 91 and its rs line is trending upward updown volume ratio is 15 with an ad rating of b another wellknown operator in the space is autozone azo autozone azo 45b market cap autozone is one of the leading retailers and distributors of automotive replacement parts and accessories for cars suvs vans and light trucks in the americas autozone offers a strong hedge against inflation as it operates in a needsbased industry and experiences low price elasticity we believe as discretionary spending power reduces and people choose to maintain their cars over upgrading them autozone a high cash flow generating company with strong growth potential would benefit and generate alpha it has a strong fundamental profile with highly stable earnings growth especially over the pandemic period eps rank 94 and composite rating of 94 it is trading at an alltime high and is extended from an ideal buy range technical ratings are solid rs rating of 94 ad rating of b and updown volume ratio of 16x institutional sponsorship has consistently risen in the past nine quarters highlighting the stock’s appeal during uncertain economic conditions finally there are always individual companies with specific trends that enable them to grow regardless of the overall economic environment one such company is ww grainger which is benefiting from a sharp consolidation in its industry ww grainger gww 286b market cap grainger is a leading broadline distributor with operations primarily in north america japan and the uk it offers more than 2m maintenance repair and operating mro products in its hightouch solutions assortment and more than 30m products through its expanding endless assortment offering it recently reported strong q2 2022 results revenue increased 20 yy to 38b 3 above consensus while eps was up 68 yy to 719 8 above consensus looking ahead the company sees 2022 eps of 2725–2875 versus consensus of 2656 the stock was up more than 14 last week and broke out of a stageone consolidation base it is actionable in the range of 530–557 the stock has strong oneil ratings and rankings eps rank of 94 composite rating of 98 smr rating of a rs rating of 93 and its rs line trending upward it also has an updown volume ratio of 15 and an ad rating of c while a volatile market can discourage stock investors there is usually something working somewhere even in sectors that are overall under pressure staying focused on stocks with strong fundamentals with positive technical patterns can help diligent investors discover such opportunities irusha peiris executive director research analyst at william o’neil and company an affiliate of o’neil global advisors made significant contributions to the data compilation analysis and writing for this article