Pauline E. Ranger Retail investors had a tough year. The SPDR S&P Retail ETF underperformed S&P by almost 30 percentage points. There are many arguments against retail, from eCommerce shifts to increased gas prices. There are still a few reasons to celebrate the holidays that are rarely discussed.
Elizabeth Hanano, CFA, suggests in this article that low expectations coupled with less-known tailwinds may indicate it’s time to dip your toes back into retail.
Investors’ hatred for retail is at an all-time high when stocks such as Macy’s trade at less than half the price of the S&P 500 (18x earnings in the next 12 months versus 7x earnings). The Wall Street Journal recently said: “It is understandable for investors to think that this holiday season will be another disappointing one, since November and December account for about a quarter (or more) of department store sales annually.”
Amazon is the main driver of the eCommerce movement. Amazon is a scumbag in every industry (including Pharma, Groceries) and doesn’t care much about short-term profits. While this is certainly a concern, non-Amazon retailers will not disappear tomorrow. People want to shop in brick-and-mortar stores. Even Amazon is joining the brick-and-mortar party.
In light of a generally favorable backdrop, retailers with (1) desirable products, (2) solid omnichannel strategies, and (3) well-controlled inventories will do well in this season. It’s always a question of separating the winners from the losers. Not all retail will be successful.
Retail forecasting is difficult to predict with certainty, given the exogenous events of today (hurricanes and wildfires, as well as political landscapes that rival Game of Thrones). Let’s look at what information we have and predict the future.
Recent Positive Comments
Trend changes are not always reflected in numbers. They can be seen at the beginning of a trend when people begin to speak.
A few retailers released their third-quarter results in early-mid November with surprising positive comments. The department stores are among the most affected by Amazon due to their high fixed costs. (The shift online reduces margins on 4-walls) And easily priced branded products. Macy’s and Kohl’s both noted that business picked up in the second half of October after the adverse effects of hurricanes and unusually mild weather had subsided. Kohl’s stated that “we’re super confident going into the fourth-quarter.” Ross exceeded both sales and earning forecasts and raised its fourth-quarter forecast.
Target’s earnings call was more optimistic than it had been for a long time about Holiday Sales 2017. Walmart also seemed to be seeing an improvement in its sales. Walmart’s comparable-store sales in the United States increased by 3%. Even foot traffic was higher, and there was “good momentum” for sales growth.
October Beige Book also showed an improvement for many states: “All retailers responding reported that sales had improved in the last six-week period. Contacts this time reported gains of 2 to 4 percent in comparable stores over the past year. Previous reports had cited negative or flat results. The consumer reported spending on furniture, clothing, and home improvement products. “Contacts are generally optimistic about the positive trend in sales continuing through the end year.”
The cooler weather is good for multiple retail sectors
The weather has been uncooperative so far this year. According to the National Centers for Environmental Information, the national average temperature for October was 55.7degF. This is 1.6degF higher than the average for the 20th century and places us in the third warmest period of history.
After last winter’s unseasonably mild winter, it appears that the U.S. is prepared for a cold blast this holiday season. The National Science Foundation recently predicted a particularly cold winter with the return of a polar vortex. Even if the temperatures are slightly lower than last year, it should still help auto parts retailers and seasonal categories as there will be pent-up demands from last year’s lack of purchases. The cooler weather encourages shoppers to buy new products, such as clothing to stay warm or auto parts that wear out more quickly in cold weather.
Weather Trends International also predicts a positive retail scenario this holiday season, with November forecast to be significantly colder y/y. The first week of the month was the hardest in the last six years. The second week in November was cooler than the previous year, with an arctic storm and minimal precipitation hitting the Northeast. This made it a good time to shop for winter-related products. Retailers are already feeling the benefits. Macy’s stated in mid-November at the Morgan Stanley Global Consumer & Retail Conference: “Obviously, a few week’s worth of weather does not equal a quarter. But this weather is quite positive for the industry.”
Stock levels are low.
Many retailers are being cautious about their inventory as they prepare for the holiday season. Some are still placing orders. According to dozens of sources who spoke to Reuters, this includes Macy’s Lord & Taylor in Hudson Bay, J.C. Penney’s Lord & Taylor at Hudson Bay, Kohl’s Nordstrom, and Dillard’s.
In recent earnings calls, many companies have echoed this message. They reported that their inventories are very clean, and they manage the list in the second half very carefully. This is good news for gross margins and markdowns, as retailers are less likely to cut prices to get rid of excess inventory. Morgan Stanley reports that inventory levels in 2Q were 210 basis points lower than the 3Q revenue growth expected. This is a good sign. J.C. Penney is one of the most significant inventory clearers. They took aggressive action mid-quarter in order to clear stagnant stock to make way for “an improved apparel assortment heading into the holiday season”, according to CEO Marvin Ellison.
The 2017 Holiday Calendar is Favorable
The sheer number of shopping days has increased. 2017 will bring an extra shopping day between Thanksgiving (31 days) and Christmas (30 days last year). Retailers are more likely to be under pressure to increase their promotional efforts and volume as the Christmas season approaches with fewer shopping days. Although some retailers are still promoting their products, it is clear that many others have not. Early promotions According to Abha Bhattarai, A more lenient calendar, according to the Washington Post, can relieve some of the pressure on marketers to push their products early and deeply.
The day of the week that Christmas falls on is favorable. This year, Christmas will be on a Monday instead of a Sunday. It means that brick-and-mortar stores will benefit from an extra day of shopping, but eCommerce won’t, as UPS and FedEx do not deliver on Sundays.
There are a lot of Saturdays. This is the first year since 2012 that there will be 4 Saturdays before Christmas Day. ShopperTrak reports that Saturdays in December can be some of the busiest days for shopping all year. They get busier each week leading up to Christmas Day.
The 52nd week. Every five years, retailers get a 52nd week in January. A whole extra week can result in a 4-5% increase in revenue. Investors are expected to consider this, but headline numbers have a big impact on momentum and sentiment. The XRT Retail ETF was launched in 2008, and since then, a 53rd Week has happened twice. In both cases, the XRT has outperformed the S&P 500 by approximately 300 basis points between the start of the fourth quarter and the end of the 1st quarter.
