For Retail, It Continues To Be A Story Of The Haves And Have-Nots

By: Spencer Israel

A google search of “Retail apocalypse” returns over 9 million results.

While the term has some cache to it—nearly 8,000 stores have closed this year per Coresight Research—it’s really become more of a misnomer. Retail isn’t in an apocalypse. It’s in evolution as traditional brick-and-mortar clashes with Amazon. And that means there will be clear winners and losers.

You don’t have to look very far to see the dichotomy. The SPDR S&P Retail ETF ($XRT), the largest retail ETF by assets, is down 5% year-to-date. The Amplify Online Retail ETF ($IBUY) on the other hand is up 19%.

So as the last few retailers release their second-quarter numbers—Five Below ($FIVE), Williams Sonoma ($WSM), Abercrombie & Fitch ($ANF), Dollar General ($DG) and Dollar Tree ($DLTR) are among those reporting this week—let’s take a look where the retail industry stands.

The Rich Get Richer

As with any industry in transition, the biggest players have used this opportunity to increase market share. In this case, the clear winners have been Walmart ($WMT), Costco ($COST), and Target ($TGT).

The three companies have seen their stocks rise an average of 38% in 2019 thanks to continued growth in the two areas Wall Street cares most about: same-store sales and e-commerce.

Walmart’s same-store sales grew 2.9% last quarter, the best in a decade, while Target’s rose 3.4%. Costco, which has yet to report earnings for the most recent quarter, saw SSS rise 9.5% in the January quarter. All three have also exceeded estimates for e-commerce growth in their most recent reports.

Clearly, the investments these stores have made in their online operations and diversifying their in-store offerings—Target recently announced a private label grocery brand—have investors pleased.

Department Stores and Apparel Are The Biggest Losers

In what has turned into an annual drumbeat, 2019 has seen the continued decimation of apparel companies and department stores.

While there are some outperformers—Lululemon ($LULU), VF Corp ($VFC), TJX ($TJX) and Ross Stores ($ROST) have all had strong years— the industries have largely continued to struggle. Keep in mind that the S&P 500 has returned approximately 15% in 2019.

Company Industry YTD %
Gap Inc ($GPS) Apparel & Accessories -38%
Limited Brands ($LB) Apparel & Accessories -36%
Foot Locker ($FL) Apparel & Accessories -33%
Urban Outfitters ($URBN) Apparel & Accessories -32%
PVH ($PVH) Apparel & Accessories -24%
Levi Strauss ($LEVI) Apparel & Accessories -23%
Ralph Lauren ($RL) Apparel & Accessories -18%
Canada Goose ($GOOS) Apparel & Accessories -16%
American Eagle Outfitters ($AEO) Apparel & Accessories -16%
Macy’s ($M) Department Stores -51%
Nordstrom ($JWN) Department Stores -39%
Kohls ($KSS) Department Stores -32%

Returns as of August 27, 2019

This weakness is reflected in the numbers. Urban Outfitters reported same-store sales down 3%, while Gap was down 4%. Foot Locker missed estimates on both earnings and sales for the quarter. L Brands gave downbeat Q3 earnings guidance and said a turnaround hinges on Victoria’s Secret. Macy’s lowered their earnings guidance for the year.

Even when the numbers are not ostensibly bad—Kohls earnings and sales were slightly above estimates and Nordstrom’s narrowed their previously issued earnings guidance—the stocks get punished. The sector is just completely out of favor right now.

The upshot: In order to survive, brick-and-mortar retailers have to show growth in their online sales. Unfortunately, not everybody can do that. For as long as that struggle continues, retail is going to continue to be a stockpicker’s market.

The author has no positions in any of the stocks mentioned in this article.

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