Thursday, May 11, 2017

Brick And Mortar Retail Is A Mess At The Moment

It seems anything associated with brick and mortar retailing is an investment that will do anything but go up. The brick and mortar retailers themselves are struggling to figure out how to compete in the internet age. Macy's (M) reported disappointing earnings today and the stock closed down 17%. After the market close, Nordstrom (JWN) reported results with earnings up 37%, yet same store sales were down a worse than expected .8%. After hours Nordstrom's stock is trading down 3.5%. The green line in the below chart represents the FTSE NAREIT Equity Regional Mall Index (FN22). This index is struggling along with the brick and mortar retailers as well.

The difficulties facing so-called mall retailers is not one of a weak consumer, but more a change in the consumer's buying habits, i.e., a transition to online retailing. This transition to online retailing is a factor brick and mortar retailers will need to solve if they are going to survive. As the first chart below shows, retail sales are growing at a fairly consistent year over year pace of 5%. We get an update on April retail sales Friday.

The below chart shows e-commerce sales as a percentage of total sales equaling more than 8% and up from 3% pre-financial crisis. At the same time, YOY e-commerce sales are growing at a steady 14% rate.

Finally, as a note of caution for investors that have a negative view on retail and want to short an ETF, be careful. The composition of some of the retail ETFs has changed to account for the greater weighting of online retail. Below are a couple of charts showing the performance of the VanEck Vectors Retail ETF (RTH) and the SPDR Retail ETF (XRT) over various time periods. As can be seen, and particularly the VanEck ETF, has exhibited strong performance relative to the S&P 500 Index. The top holding in RTH is Amazon (AMZN) at a 17% weighting. Also in the top five is (JD), the Chinese online retailer, at a 5.4% weighting,

For brick and mortar retailers then, figuring out the puzzle of utilizing their physical space, while at the same time converting online shoppers to foot traffic, will be key. The successful ones will see their stock price increase from these depressed levels.

No comments :