WING - Student loan payments will resume after Supreme Court ruling - watch these consumer discretionary stocks

2023-06-30 10:59:44 ET

The Supreme Court ruled by a 6-3 vote on Friday that the U.S. Education Department does not have the right to forgive student debt under the HEROES Act.

The SCOTUS decision could have some ramifications in the consumer sector with high interest rates and other macroeconomic pressures still in the mix. Over 45M people have student loans, with the average balance at around $35K. Of note, about 40% of Millennial households and 25% of Gen X households have student loan debt.

Analysts believe U.S. consumers with student loans will likely disproportionately reduce spending on soft goods in comparison to other categories as they shift funds to pay down debt. Wells Fargo estimated the upcoming student loan repayment headwind of up to $6B per month could impact discretionary consumer spending by 1% to 2%. The firm noted Dick's Sporting Goods ( DKS ), Best Buy ( BBY ), Target ( TGT ), and Ulta Beauty ( ULTA ) screen the worst within the sector for potential exposure to a negative impact from student loan payments starting again. Gordon Haskett warned the resumption of federal student loan payments for ~27M borrowers in September could weigh on Q4 order volumes for DoorDash ( DASH ) with delivery costs well above traditional carryout. DoorDash ( DASH ) recently lost its bull rating at the firm due in part to the student loan repayment issue. For its part, UBS thinks brands and retailers more likely to be negatively impacted by the student loan issue include American Eagle Outfitters ( AEO ), Carter's ( CRI ), Crocs ( CROX ), Foot Locker ( FL ), Canada Goose ( GOOS ) ( GOOS:CA ), Gap ( GPS ), Nordstrom ( JWN ), Nike ( NKE ), Steven Madden ( SHOO ), Under Armour ( UA ) ( UAA ) and Victoria's Secret ( VSCO ). Jefferies recently warned that Five Below ( FIVE ) faces an earnings headwind due to the resumption of student loan payments, while Citi already downgraded Target ( TGT ) due to chiefly to the risk.

Analysts think the millions of borrowers who have yet to make a single student loan payment are most at risk of cutting back on some discretionary spending due to personal budget shock. Amid ongoing price inflation in the restaurant sector, there is rising that anxiety restaurant sales could face a noticeable headwind in Q3 and Q4. Fast-food chains and fast-casual names with a higher than average mix of customers under the age of 30 include McDonald's ( MCD ), Yum! Brands ( YUM ), Restaurant Brands International (NYSE:QSR), Noodles ( NDLS ), Jack in the Box ( JACK ), Wendy's ( WEN ), Potbelly ( PBPB ), Chipotle ( CMG ), Domino's Pizza ( DPZ ), Papa John's International ( PZZA ), and Wingstop ( WING ). To a lesser extent, Starbucks ( SBUX ) could also be impacted if borrowers are pressed to cut back.

The SPDR S&P Retail ETF ( NYSEARCA: XRT ) underperformed the broad market on Friday with a 0.75% swing lower.

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