Shopping For Alpha In Consumer Retail

Cross-Section of Returns Explained by Industry KPIs

Can analyst forecasts of industry-specific metrics generate alpha in a cross-section of returns in that industry?

In seeking an answer to this question through an in-depth analysis of the consumer retail industry, Visible Alpha’s data science team demonstrates that analyst expectations of two popular retail-specific metrics – comparable sales growth and operating margin growth – generate significant long/short spreads in U.S. consumer retail portfolios. Our results provide direct evidence of value in systematically incorporating analyst expectations of industry-specific metrics into quantitative factor models.

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Three Key Findings:

  1. A long/short strategy taking positions only in what analysts believe to have better- or worse-than-median comparable sales and operating margin growth together has yielded 1.2% monthly alpha since 2017.
  2. The excess returns disappear when these two industry-specific KPIs are replaced with more generic accounting metrics, such as revenue growth and net margin.
  3. While comparable sales expectations today are a little shy of converging to the pre-pandemic norms, the operating margin expectations still have a ways to catch up, potentially reflecting long-lasting impact of inflation and supply-chain disruptions.

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