The storm for retailers

Fidelity’s Boris Shepov sees reasons to invest defensively in the retail sector.

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Fidelity's Boris Shepov says it's hard to remember a time when the retailing industry had so many crosscurrents to navigate—from the positive, headlined by rising wages, low unemployment, and high levels of consumer savings, to the negative, including rising cost inflation, persistent supply-chain disruptions, higher gasoline prices that in some cases are curtailing store visits, and geopolitical risks related to the war in Ukraine.

"There's a lot of uncertainty in parts of the retail segment early in 2022, and I've become slightly more defensive and even more selective regarding company fundamentals," says Shepov, portfolio manager of Fidelity® Select Retailing Portfolio (FSRPX).

Some of the metrics Shepov is watching closer than ever are profit margins and free-cash-flow generation. He and the research team have modeled margin and FCF expectations for each of the companies in the portfolio and almost all the major players in the industry, regardless of whether they are held or not. The shifting landscape, he says, has led to recent revisions based on the cost of freight, for example.

He's also looking closely at retailers' human capital management and hiring practices. In a hypercompetitive job market in which many retailers are struggling to find workers, he believes the retailers people want to work for have a considerable advantage.

Lastly, Shepov is looking closely at companies' supply chains. Industrywide, he hasn't seen meaningful improvement on this front yet, although he contends certain retailers have a far better handle on the situation than others.

With all of this in mind, Shepov says he's recently added to several off-price and discount retailers, including Burlington Stores (BURL), Dollar Tree (DLTR), and Five Below (FIVE), the latter of which he likes for the management team's ability to source low-cost, on-trend merchandise.

He's also capitalized on a pullback to increase his position in leading hard-surface flooring retailer Floor & Decor Holdings (FND), based on his belief that the company can manage supply-chain issues better than small independent retailers and continue gaining significant market share in this growing category.

"I'm taking in all the variables and trying to find the companies I believe will succeed over time," he says.

For specific fund information, including full holdings, please click on the fund trading symbol above. Securities mentioned were fund holdings as of April 30.

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