As we wrap up another quarterly earnings season marked by strong earnings, the retail sector has the feel of a dead man walking. Macy’s, Kohl’s and JC Penney had dismal earnings reports. Of the major brick and mortar retail sales Nordstrom was the rare positive earnings surprise (a modest 1.7% growth in same store sales).
The retail sector has suffered a very tough year in both the news and the market. While the S&P 500 has enjoyed over 8% returns (through August 18, 2017), the retail sector has lagged tremendously. The SPDR S&P Retail ETF has posted a loss of nearly 13% year to date. It’s hard to make it through a day without some headline trumpeting the impending doom of brick and mortar retail.
Meanwhile, Amazon has enjoyed incredible returns this year, even considering a recent dip after a second quarter earnings missed analyst estimates.
So has Amazon killed brick and mortar stores? Are people doing all of their shopping online? Surprisingly, the data shows that online sales still represent a small minority (barely 10%) of overall retail sales.
In fact, Amazon is quietly building up a sizeable brick and mortar presence itself. Amazon has opened 8 book stores, and nearly 40 “pop-up” stores, with more planned. There is also the recent blockbuster acquisition of Whole Foods, and its vast network of upscale grocery stores.
What does this all mean?
It’s clear that people’s shopping habits are changing, especially for purchases that are easily repeatable. Do you need a box of diapers every other week? Amazon has you covered, and will make sure that box is on your doorstep. However, despite their efforts with Amazon Prime Now with nearly contemporaneous delivery, sometimes it is just more convenient to go to a store and purchase an item in real time.
Legacy retailers are struggling to adapt to the new way the consumer does his or her shopping. They are saddled with large overhead from their large network of physical stores. Many have not yet created an online presence that is competitive with the ease and simplicity of Amazon’s online shopping experience. If they don’t evolve, their specific futures are likely challenged. However, many are adapting, shedding low performing stores and cutting overhead. Almost all retailers have invested in building out their online shopping experience, and many, like Walmart, have created preferred memberships complete with free shipping and returns to compete with Amazon’s Prime memberships.
While Amazon has undoubtedly transformed the retail world, brick and mortar retail is likely to survive. People will always need to “run to the store.” Retail has resurrected itself from its apparent demise before. In the midst of the “dot.com”: bubble of the late 1990’s and early 2000’s, retail struggled as the market turned its attention to the potential of the internet. While the headlines may be negative, it is important for long term investors to see through the alarmist headlines and stay disciplined in their investments. News outlets need readers, and they often use bombastic headlines and catchy articles to drive readership. Successful investors stick to their discipline, even when bylines say otherwise.
Chart Sources: S&P500 & SPDR Retail ETF YTD returns and Amazon YTD Returns source: Ycharts; US Retail Sales sources: U.S. Bureau of the Census; fred.stlouisfed.org