Despite a murky retail outlook, the discretionary names outperform. The S&P 500 Discretionary Sector (NYSEARCA: XLY) is the second-strongest growing sector in the third quarter (Q3); it outperformed its consensus expectation by double and can continue this trend in Q4 and 2024. Some discretionary names struggle. Target Corporation (NYSE: TGT) is among the leaders in that group. 

Still, others are in a position normalized from the wicked swings in business, driven by pandemic spending and the bursting bubble. 

Companies like Macy’s Inc. (NYSE: M), Abercrombie & Fitch Co. (NYSE: ANF) and American Eagle Outfitters Inc. (NYSE: AEO) have returned or are returning to growth, are widening margins and are on track to deliver value to shareholders. They have brand entrenchment, high-quality merchandise and omnichannel businesses in common. 

Macy's at rock bottom; reversal imminent

Macy's shares hit a multi-year low in late October after trending lower for three years. That low sparked a bottoming in the market, amplified by the Q3 release. The company is still in contraction but outperforming with only a single-digit decline and should produce relatively flat results next year. 

Margin, guidance, dividend and distribution growth outlook are the critical details from the report. The company produced a better-than-expected margin, outperformed on the bottom line, improved its guidance to above the consensus estimates and strengthened the distribution outlook. 

Macy's pays a relatively reliable 4.6% yield. It is relatively reliable because the company suspended the payment and later reinstated it at a lower rate during the pandemic. That's part of why the stock trades at its current valuation. 

Still, it is in a solid position to grow the distribution today. The payout is less than 25% of the earnings outlook, and the balance sheet is solid. The company's long-term debt is less than 0.75% equity, and the cash and inventory position is good. Cash is up year-over-year (YOY), with inventory down 6% YOY and 17% compared to 2019. 

Macy's stock is forming a tower reversal, marked by a large red candle followed by consolidation and a large green candle. This pattern marks a reversal from down to sideways and may lead to additional consolidation. Analysts have pegged the stock at "reduce," but the community lifted its price targets following the Q3 release. 

Buy the dip in Abercrombie & Fitch 

Abercrombie & Fitch is in a strong uptrend and may pull back following its Q3 release despite the expected strength. The analysts have been raising their targets for the stock all year, leading the market higher, but it is trading near the top of the range. In this scenario, a significant outperformance can get the market to continue higher without a correction or pullback. 

Until then, the analysts' consensus expects 12% top-line growth and potential for margin contraction. Based on results from Macy's and other discretionary names, it is probable that bottom-line results will be better than currently expected. 

Abercrombie & Fitch has not reinstated its dividend yet. The company suspended it during the pandemic to preserve capital and the balance sheet to good effect, but it is positioned to bring it back now. The pre-suspending rate of 80 cents is less than 20% of earnings.

American Eagle is in reversal and ready to soar 

American Eagle is a value compared to ANF stock trading at 14X its earnings, and the technical picture is more favorable. Where ANF should pull back, American Eagle is in reversal and could soar over the next quarter. The stock also pays a 2% dividend yield with a reasonable degree of safety. 

American Eagle's current dividend payout is worth about 16% of the earnings consensus, and there is an expectation for outperformance and growth to continue in 2024. The Q4 consensus expects low single-digit revenue growth and margin expansion into 2024. 

Analysts rate this stock at "hold," but there are enough upgrades and price target revisions to have it on the "most upgraded" list. The consensus target implies the stock is overvalued at $19.50 but is trending higher and helping to support the market.