Navigating the Retail Shift: Where to Invest in a Demand-Conscious Market

The U.S. retail and wholesale sectors are at a crossroads. April 2025 inventory data reveals a stark divergence: stagnant wholesale inventories (+0.0% month-over-month) and declining retail inventories (-0.1% month-over-month) signal a slowdown in demand, yet select sectors are proving remarkably resilient. This is not a uniform downturn—it's a reshaping of consumer priorities. For investors, the challenge lies in identifying pockets of strength while avoiding overexposure to fading industries.

The Resilience Dividend: Sectors to Double Down On

1. E-Commerce and Tech-Adoptive Retailers: Leading the Efficiency Revolution

The shift to AI-driven supply chains is no longer optional—it's a survival imperative. Companies like Lowe's (LOW), which launched an Apple Vision Pro app for immersive kitchen design, are redefining customer engagement. Similarly, Mattress Firm (now part of Crown Mattress & Linens) uses AI inventory optimization to reduce stockouts by 30%. These firms are leveraging technology to cut costs and meet evolving consumer expectations.

2. Building Materials: A Steady, if Slower, Growth Engine

Despite manufacturing PMI contraction (49.2%), building materials sales rose 0.8% month-over-month in April. This reflects a resilient housing market and investor appetite for DIY projects. Companies like Lowe's and Home Depot (HD) are well-positioned to capitalize on this niche, even as broader retail struggles.

3. Restaurants: Service-Driven Spending Holds Steady

While overall retail inventories dipped, restaurants like Applebee's (part of Dine Brands, DIN) are thriving by modernizing operations. Toast POS systems have slashed order errors by 40%, while casual dining outperformed fast-casual chains. This sector's focus on experiential consumption aligns with post-pandemic preferences.

The Fragile Five: Sectors to Avoid or Underweight

1. Apparel: The Victim of Tariffs and Overstocked Shelves

Apparel inventories are bloated, with companies like Capri Holdings (CAPR) and Under Armour (UA) facing profit declines of over 100% year-over-year. Consumers are cutting back on discretionary purchases like fashion, opting instead for essentials or experiences.

2. Department Stores: A Structural Decline

Macy's (M) and Kohl's (KSS) reported same-store sales declines of -4.3% and -5.4%, respectively. These legacy retailers, burdened by high fixed costs and outdated inventory systems, are losing relevance to omnichannel competitors.

Fed Policy and the Yield Play: A Strategic Hedge

The Federal Reserve's reluctance to cut rates (currently 4.25%-4.50%) amid tariff-driven inflation creates uncertainty. Investors should pair equity exposure with high-quality bonds (e.g., Treasuries or municipal bonds) to cushion volatility. The Applebee's example highlights how operational efficiency can thrive even in a constrained environment.

Actionable Investment Thesis

• Buy: Lowe's (LOW) for its tech-driven inventory management and housing sector resilience.
• Hold: Dine Brands (DIN) for its focus on service and operational innovation.
• Avoid: Macy's (M) and Capri Holdings (CAPR) until inventory overhangs clear.

The retail landscape is fracturing, but the winners are clear: companies with agile supply chains, consumer-centric tech, and exposure to non-discretionary spending. This is not a time for broad bets—it's a moment to pick the disruptors and avoid the dinosaurs.

Act now before the next inventory report reshapes the landscape.