Brent Williams, CFA, Senior Research Analyst
Throughout 2019, the U.S. consumer has remained the strongest part of the global economy. After 2018’s relatively weak holiday shopping season, many investors feared a slowdown would continue into 2019. Instead, year-over-year growth in consumer spending has hovered near a healthy level of 4% throughout most of 2019 (see Chart 1). Yet, despite solid consumer spending, retail companies continue to face challenges.
There have been additional bankruptcies of once successful chains in 2019, and in aggregate, retail stocks have underperformed the strong gains of the S&P 500 so far in 2019. However, headwinds have proven to be manageable for retail companies that are financially able and willing to invest in their merchandise and services. Large, diversified retailers with the initiatives to improve both their physical and digital stores have thrived in 2019. Discount/lower-priced retailers in particular have showed success, demonstrating that Americans are still shopping, but are focused on finding good deals. Examples of companies that have capitalized on these recent trends include Costco, Walmart, and Target.
Tariffs are an additional negative factor that has emerged for retailers over the past year. New tariffs, primarily for imports from China into the U.S., have increased the cost of merchandise for items like furniture and apparel. Retail companies exposed to tariffs have to make the difficult choice of either absorbing these higher costs, which in turn harms profitability and earnings, or attempt to “pass on” the cost to customers through higher prices, which risks damaging demand and can lead to lower sales. Smaller, niche retailers have been the most impacted by tariffs, while the largest and most diversified retail companies benefit from superior flexibility, by sourcing alternative suppliers and/or negotiating better terms with existing suppliers.
Looking to the Future
So what do these overall retail trends mean for investors as they look ahead? Retailer real estate is an area to watch. Companies with large ownership of real estate assets in lower-tier mall and outlet mall locations have come under financial pressure as they attempt to fill empty locations after retail customers have closed stores. Alternative uses for these properties have emerged that provide other sources of rental income, including fitness centers and warehouse fulfillment centers, but whether these prove to be a sustainable, long-term solution for retail real estate companies is still to be determined.
Looking at government data for retail sales, the “non-store” (i.e., online) category continues to display the highest growth, and the trend remains strong. During the third quarter of 2019, non-store retailer sales increased nearly 16% year-over-year compared to total retail sales growth of 4%. Amazon’s “Prime Day” in July and Alibaba’s “Singles Day” in November both set new records in 2019 as shoppers cashed in on special deals, and shoppers continue to shift more of their repeatable, everyday purchases online. However, still less than 11% of all retail transactions occur online (see Chart 2) and there is room for additional growth — this remains both a risk and an opportunity for retail companies in the coming years.
Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original publication of the report. These opinions are subject to change at any time without notice. Investors must bear in mind that inherent in investments are the risks of fluctuating prices and the uncertainties of dividends, rates of return, and yield. Investors should also remember that past performance is not necessarily an indicator of future performance and D.A. Davidson & Co. makes no guarantee, expressed or Implied to future performance. Investors should consult their Financial and/or Tax Advisor before implementing any investment plan. Copyright D.A. Davidson & Co., 2019. All rights reserved. Member SIPC.