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Why Retail Stocks May Have a Good Holiday Season

The holiday season can be make-or-break time for retail stocks.

As malls see lower foot traffic and more shopping moves online, affecting stores like Sears Holding Corp. (ticker: SHLDQ) and J.C. Penney Co. ( JCP), there are questions about the viability of brick-and-mortar retail stores in the era of Amazon.com ( AMZN).

But it’s not like Americans aren’t shopping, they’re just doing it differently. The National Retail Federation forecasts that Americans will increase spending between 4.3 and 4.8 percent this holiday season. Not all of that money will go to Amazon.

Michael Sheldon, executive director and chief investment officer at RDM Financial Group–HighTower Advisors in Westport, Connecticut, says the retail federation’s forecast compares with an average annual increase over the past five years at 3.9 percent per year. He adds that Moody’s expects holiday sales to be up between 5 and 6 percent, while Deloitte is looking for a rise between 5 and 5.6 percent.

“I think most retailers are probably looking forward to the upcoming holiday season,” he says.

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The economy helps. Pat O’Hare, chief market analyst for Briefing.com in Chicago, says any discussion about retailers starts with the overall economy — which is good. He points to the outperformance of the SPDR S&P Retail exchange-traded fund ( XRT) versus the broader S&P 500. The XRT is up 10.8 percent year to date compared with the SPDR S&P 500 ETF ( SPY), which gained 6.7 percent.

A tight labor market and signs that wages are increasing, even though real earnings growth is lackluster, is a good thing overall, he says.

“If (consumers are) thinking that they’re not at risk of losing a job and they’re starting to see their income pick up a little bit, it lends some confidence to spend and maybe spend a little more than they normally would,” O’Hare says.

Sheldon agrees, noting the most recent Bureau of Labor Statistics employment data show that average hourly earnings increased to 3.1 percent, the highest rate since the Great Recession.

Amanda Agati, co-chief investment strategist at PNC Financial Services Group in Philadelphia, says while some people might point to weak retail sales data from September as a red flag for holiday spending, she says that figure was likely skewed by Hurricane Florence and Tropical Storm Gordon, since much of the drag came from fast-food restaurants shuttering for hurricanes.

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Unlike the last two years when some people rang a death knell for physical stores, O’Hare says that’s not necessarily the case this year.

Some savvy retailers made technology investments to improve order fulfillment and delivery capability. Brick-and-mortar companies are starting to make some competitive inroads against Amazon that probably could not have been made a few years ago.

“Amazon is still the big kahuna and it will remain the case, even for this holiday selling period,” O’Hare says. “But I think that one of the themes that will emerge out of this selling season is that, maybe not every company in the retail space, but certainly a growing number of companies, are getting their business model right in an omnichannel existence, or they can deliver either via stores or online through a mobile app. That recognition is what also contributed to the relative strength and the broader retail group in 2018.”

Omnichannel refers to selling multiple ways — in store, online, via mobile apps or other ways.

Discount pricing is increasing sales for some retailers. Experts say stores like Kohl’s Corp. ( KSS), Target Corp. ( TGT) and Walmart ( WMT) are becoming better organized against Amazon. Budget-conscious pricing is helping these retailers in the current economic environment. Both Sheldon and O’Hare flag off-price department store retailer TJX ( TJX), owner of TJ Maxx and Marshalls, as a retailer that’s doing exceptionally well.

O’Hare says TJX has a strong niche of offering brand-quality items at discounted prices that fits into the economic environment where consumer earnings growth seems to be picking up.

“They just keep knocking it out of the park,” he says. “Consumers are out there continuing to look for reasonable and attractive price points and that caters right into the sweet spot for a company like TJX.”

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Department stores have been hit hard in the shift in consumer spending, but don’t completely count these retailers out as an investment opportunity, Agati says.

“There’s still a pretty big distinction between the haves and have-nots in retail,” she says. “But I think the important thing to remember is that even the traditional retailers like the department stores, they’re really high free-cash-flow-generating businesses. And so even if the growth story isn’t really strong, a strong business that is throwing off decent free cash flow can actually be a fairly attractive investment opportunity.”

While Agati thinks the strongest retailers are still in the lower or middle market, O’Hare says high-end retailers like Tiffany & Co ( TIF) are poised to do well. Even though the stock market saw a correction in October, he says people who invested in equities in this current bull-market run are still sitting on healthy gains.

“I think that wealth effect will still carry through and help some of those luxury retailers like a Tiffany and maybe even a like a Ralph Lauren,” he says.

Sheldon says there are still some headwinds retailers will need to face, such as the pressure of rising wages. For instance, Amazon announced it will start paying employees $15 an hour, which could ripple to other retailers. The ongoing trade dispute with China is also raising costs for some merchants, making these businesses reevaluate supply chains.

But Agati says retailers might benefit as investors start shifting from growth stocks to value.

“To the extent that we move a little bit into the later innings of the cycle, we might see value reassert itself, and I would throw a lot of the more traditional retailers kind of into that margin-of-safety, value-orientation type category,” she says.

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Why Retail Stocks May Have a Good Holiday Season originally appeared on usnews.com



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