Who is Winning in Retail?

Key Points

• Retail is far from dead.
• This earnings season has highlighted the strength of the retail industry.
• Specialty niche retailers have struggled.
• Large retailers with diverse products tend to perform better.

The Death of Retail?

The death of retail has been a common belief among a lot of investors. Amazon and the internet had taken the retail world by storm, causing brick and mortar stores to shut down, and business to dwindle. The retail apocalypse was upon us, and it seemed like there was nothing big retailers could do to stop it.

I previously wrote about retail, more specifically, the fact that the XRT retail ETF had made new highs earlier this year. At the time, there was doubt the highs would last. Not because retail is doomed, but because trade disputes promised to raise the price of goods retailers sell. 

However, the trade rhetoric has largely gone unnoticed in the U.S. economy, and retail earnings are showing signs of a strong consumer.

News outlets, like Bloomberg, seem to consistently show one retailer doing very well and one doing poorly. This has led me to believe there is a divide in the retail industry, and it could possibly be exploited, if I can determine what is causing the divide. So that is the goal of this post.

Industry Losers

The first step was to select the stocks. Large retail companies were chosen, such as Best Buy, Lululemon, Ross, and Nordstrom’s. These are national companies, and cater to a lot of the economy. 

The list of companies varies from discount stores to electronics to high-end retail. Overall, I looked at 20 stocks to try and determine which retailers were dying, and which ones were thriving.

Of the 20 stocks analyzed, only four were given a sell rating: JC Penny, Bed, Bath & Beyond, Gap, and GameStop. At this point, all investors know JC penny is failing. They have not been able to innovate their stores to attract a solid customer base.

GameStop

Bed, Bath & Beyond and GameStop are specialty niche stores, and that may be their problem. GameStop sells video games, but now competes with several different Netflix-like options. 

Xbox Game Pass, EA Access, and Game Fly are all options for consumers to play video games, without actually committing to owning the game. Instead, consumers pay a monthly fee to play an assortment of games as they please.

Bed Bath & Beyond

Bed, Bath and Beyond’s niche is in home goods. The problem is that this is all they sell. Consumers only go to the store for one-off home items, and not much else. People don’t need to go to a department store for their home every week. 

When they do want to, Amazon, Wayfair, and other internet based companies can provide consumers with their needs. Internet users can also use reviews to determine a good product. Retailers cannot provide this type of insight in store.

Gap Inc.

Gap’s problems are not so easily identifiable. The company owns Gap, Old Navy, and Banana Republic. While Old Navy continues to grow, these stores are simply performing weaker than analysts expect. The sell rating is based on the reaction post earnings report.

What Makes a Good Retailer?

Discounts/Value

Retailers like Target or Kohl’s focus on saving money. Shoppers feel like they are getting a good value, and that may allow them to buy more than they otherwise would. Plus they have a large assortment of products in their stores. 

Variety

A consumer can go in looking for a shirt, but as they walk through the store they are surrounded by many other items. This can potentially influence more sales as the customer sees other products. 

In addition, the wide range of products is also convenient for customers. At Target, customers can buy milk and a t-shirt in one trip to the same store.

Diversified Selection

A variety of products is a characteristic of a good retailer, but so is a diverse selection of one type of product , such as clothes. Nordstrom’s is doing well, but they really only sell apparel. However, they carry a vast amount of brands and types of clothing, similar to Ross and TJ Max, but with a focus on high end fashion. 

When a customer visits their stores, whether it is the regular store or Nordstrom’s Rack, they are able to look through their vast selection and compare brands and prices. It provides an easier experience. This is also how Best Buy operates, but with electronics.

Conclusion

Retail is far from dead. Large retailers, and consumer discretionary stocks in general, are pulling the stock market up. While it can be argued that Amazon has changed the way people shop, it could also be argued that consumers felt a lot weaker prior to the election of Trump. His election has been credited with the revival of “animal spirits” in the economy.

Strong consumer confidence has brought people out to the stores to go shopping in person. More people are willing to spend their money, and retailers are reaping the benefits. 

Retailers that can provide a good value and convenience, are seeing better earnings and stronger stock prices. As long as consumers keep their confidence in the economy, these stores should continue to do well.

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Visit https://www.brtechnicals.com/finding-the-difference-between-good-and-bad-retailers/ to see all of the charts!

Submitted August 27, 2018 at 05:01PM by BR-Technicals https://ift.tt/2BNZYaw