Retail sales disappointed in July. Blame it on the hot weather. Maybe everyone just wanted to stay at home in the air conditioning.
Whatever the case was in July, the winds were shifting in the U.S. retail sector. This much is clear. Last week's monthly retail sales figure came in flat in July, following a 0.8% rise in June. Total sales gained 2.3% on a year-over-year basis.
Within the retail sector, consumer preferences involved clicks over bricks. The results showed that department stores experienced falling profits and lower sales. For example, last week, J.C. Penney reported another loss for the quarter. Macy's, Kohl's, and Nordstrom also reported declining sales.
Stock returns back up these trends. Internet retail stocks posted gains of 8.2% through August 12 versus a 4.6% gain in department store stocks.
Strolling Saturday Afternoons in the Mall
Physical stores are not going away, says Efraim Levy, equity analyst at S&P Global Market Intelligence. But, he adds, the percentage of transactions initiated online is expected to continue growing.
Traditional brick and mortar retail stores continue adjusting and adapting to changing consumer preferences. Last week, for instance, Macy's announced it would close 100 stores as shoppers spend more online and at discount chains.
For many brands, this could mean continuing to operate a few flagship stores and focusing the rest of sales in the online channel, says JJ Kinahan, chief market strategist at TD Ameritrade.
The retail business is changing dramatically due to technology, Levy says. Now, the traditional brick and mortar stores are well into a transition phase, which includes physical stores along with online buying opportunities and numerous delivery options.
These former retail giants are now investing in technology infrastructure to offer consumers numerous purchasing options including:
- Buy online, pick up in the store
- Buy online, ship to your home
- Buy in store, have it shipped to your home
This means changes for the in-store environment too, which includes employee staffing for the now popular in store pick-up option. It's all a big transition phase for these traditional brick and mortar retailers.
What this means for investors: Traditional brick and mortar stores are attempting to develop a new business model and finding a balance that works and is profitable, Kinahan says.
"When you have a business model question, it’s worth considering how much of a portfolio do you want to allocate to these stocks," Kinahan says.
TD Ameritrade clients can compare long-term retail stock performance trends, using a percentage chart, Kinahan says. "Because the stock prices are so variable, the percentage comparison is the proper way to do this," he explains. See figure 1 for an example of a comparison chart using percentages.
Within the retailing arena, Levy points to a sweet spot in the discount stores category. This includes names such as Family Dollar, Dollar General, and Dollar Tree. The fundamentals are generally positive for the discount chains, he says. "There is consistent demand at the discount stores. There are those who need to purchase low price items and these stores generate repeat business," Levy says. He also notes that these discount retailers tend to show relatively higher profit margins than other retailers.
These days, even the discounters are getting in on the online sales action. Consumers can already buy online at Dollar General and Dollar Tree.
The 2016 PricewatershouseCoopers Total Retail Survey of shoppers in 25 countries found that 54% buy products online weekly or monthly and 34% agree that a mobile phone will become a primary purchasing tool.
The shopping revolution is just getting started and this may mean survival of the fittest in the retail world.