Out of the 10 S&P 500 sectors — soon to be 11 as Real Estate will be added on August 31 — Retail is perhaps one of the best in which to go stock picking, as trends are easily identifiable. Over the past 12-18 months, we have seen some very clear winners and losers emerge.
"Are traditional brick-and-mortal retailers dying a slow death?" was the biggest question that investors were asking this week. Earnings were disastrous for department stores like Macy’s, JC Penney, Kohl’s and Nordstrom, which all cut earnings and profit projections, citing slowing foot traffic and structural issues.
It's insightful to track where all of the foot traffic is going because consumers are spending money as retail sales data showed on Friday morning, posting the largest gain in a year. The big draw is Amazon.com, of course, because we all want instant gratification and the ease of shopping from the couch in pajamas. Just drill down into the data for confirmation. Receipts at clothing stores surged 1 percent, while online retail sales jumped 2.1 percent, the biggest gain since June 2014.
Another area in retail that is benefiting from the downward spiral of the Department Store sector is discounters, like TJ Maxx, Ross Stores and Burlington Coat Factory. When department stores have excess inventory they can’t move off the shelves, whether due to slow traffic or unseasonable weather trends, the discounters benefit because they can negotiate fabulous deals for that merchandise. Better deals for the discounters translates into 20 percent to 80 percent savings for the consumer.
Since consumers are pickier than ever with their discretionary income, we have come to expect discounts and like to feel we are getting a “great deal.” The more the discounters can offer this, the more foot traffic they will take from the department stores.
The trend of online and discounter shopping, coupled with social media, will continue to add pressure to department stores. This is not just an isolated theme for this quarter’s earnings season. Analysts at JPMorgan told investors they think retailers targeting the high-end consumer are most at risk for a further sales step-down in 2016, and the analysts cut their price target 20 percent to $34 per share.
There is only so much cost-cutting the department stores can do before they have to question how sustainable the business is in the current environment. In years past, the mall was a social experience as well as a shopping one. That seems to matter less now that our social structure is around “digital peers.”
Trading week ahead
Investor focus now shifts to the G7 Finance Ministers and central bank governors meeting late next week in Japan.
The G7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. Central bank policy, which has been one of the biggest drivers behind the market and Brexit risk in June will be discussed. Brexit refers to the referendum in June about the U.K. leaving the European Union.
Following strong retail sales data, investors will look to see if that strength spilled over in the housing market.
Housing Starts and Existing Home Sales will be released. These powerful pieces of data have a strong impact on the economy and will give more clues into the strength of the consumer.
Other key data include the Consumer Price Index (CPI) and Federal Open Market Committee (FOMC) minutes. While investors do not expect a change in the minutes from the last FOMC meeting, the release at 2 p.m. ET on Wednesday will move the markets as traders pick apart each word looking for clues to monetary policy.
Most of the S&P 500 has reported earnings, but there still are several retailers on the calendar, including Home Depot, TJ Maxx, Lowe’s, Target, Urban Outfitters, Dick’s Sporting Goods, Wal-Mart, Gap Stores and Ross Stores. Expectations are for continued weakness in traditional brick-and-mortar stores, while strong reports are expected from the discounters and home improvement stores.
Analysts at Jefferies investment banking firm say they expect strong results for Home Depot and Lowe’s, reflecting a favorable spending backdrop for the industry and early start to the remodel/construction season due to warmer weather early in the first quarter. In fact, Jefferies took up their estimates and price targets on both stocks heading into the earnings reports.