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Retailing: Survival of the Fittest

Retailing: Survival of the Fittest
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Friday, 16 March 2018 02:07 PM Current | Bio | Archive

The 2017 end-of-the-year rally that propelled investors to snap up retail shares has lost a little steam this year. However, you’d never know it by looking at the performance of the S&P 500 Consumer Discretionary stock price index, which is up 7.1% ytd, beating all of the S&P 500 sectors save Technology.

Here’s the performance derby for the 11 S&P 500 sectors ytd through Tuesday’s close: Technology (10.2%), Consumer Discretionary (7.1), Financials (4.5), Health Care (4.2), S&P 500 (3.4), Industrials (1.3), Materials (0.4), Consumer Staples (-4.8), Telecom Services (-5.4), Real Estate (-5.6), Utilities (-6.3), and Energy (-6.6) (Fig. 1).

The Consumer Discretionary sector is being weighed down by Specialty Stores (-8.7% ytd), Home Furnishings (-7.1), Home Improvement Retail (-6.3), Apparel Retail (-2.5), and General Merchandise Stores (-0.9). The slide in these industries was corroborated by the 0.1% m/m drop in February retail sales. It was the third month in a row the indicator has fallen—the first time that has happened since 2012, Debbie reports. That said, retail sales are still up 4.0% y/y.

The negative momentum in the above retail industries has been more than offset by the gains in the Internet & Direct Marketing Retail industry, home to Amazon and Netflix, which is up 37.0% ytd. The S&P 500 Department Stores index is also solidly in the black, up 15.3% ytd. Exclude the Internet & Direct Marketing industry, and the Consumer Discretionary sector is down 2.1% ytd. Back out the Department Stores industry as well, and the Consumer Discretionary sector is down 2.3% ytd, according to Joe’s calculations.

The S&P 500 Department Store index’s three members—Kohls, Macy’s, and Nordstrom—all have outperformed this year. But not all department stores are faring well. Shares of Sears Holdings are down 28.8% ytd, and regional department store Bon-Ton Stores filed for Chapter 11 bankruptcy protection in February.

Within the trio of department store outperformers, Kohl’s stands out for both the strongest stock performance and for reimagining ways to better use its bricks-and-mortar stores. The retailer’s stock is up 18.2% ytd and 61.0% over the past year.

Let’s take a look at what this department store has done to shake off the industry’s blues:

(1) Smaller is smarter. Kohl’s has been opening smaller new stores and shrinking existing ones. Smaller stores are roughly 35,000-55,000 square feet instead of the traditional 80,000 square feet. The smaller size allows the company to enter smaller markets and carry less inventory without losing sales.

At the end of Q4, 300 of the company’s stores were in the small-to-standard size category, and Kohl’s anticipates continuing the rollout of the program to another 200 stores this year.

Sometimes, Kohl’s will sublet its extra space to other retailers. In Framingham, Massachusetts, Kohl’s cut 20,000 square feet, and the landlord leased the excess space to a Pier One. Another Kohl’s, in Medford, Massachusetts, cut 30,000 square feet that was then leased to Wegmans, according to a 2/23/17 article in the Milwaukee Journal Sentinel.

The company believes grocery stores and gyms are ideal new neighbors because both draw traffic to the stores. And since most Kohl’s are in strip malls instead of traditional malls, their locations are in demand. Kohl’s latest announcement: It will lease space in five to 10 of its stores to Aldi, the German grocer expanding aggressively in the US.

Kohl’s hasn’t been aggressively closing stores as have some of its competitors. It ended 2017 with 1,158 stores and selling footage of 82.8 million square feet, down only slightly from 2015 levels of 1,164 stores and 83.8 million square feet.

(2) New partners. Investors are excited about the deals Kohl’s struck with Amazon and Under Armour. Starting in October, Kohl’s began providing free returns for Amazon customers in 82 Kohl’s stores across Los Angeles and Chicago. The deal offers Amazon customers added convenience and gives Kohl’s a new way to drive traffic to its stores.

Kohl’s also benefitted from the addition of Under Armour products to its active wear collection. The two companies struck a distribution deal in 2016, and sales began last spring. Kohl’s footwear and apparel same-store sales grew 25% in Q4, thanks to high-single-digit increases in Nike sales, double-digit increases in Adidas sales, and the introduction of Under Armour product, the company revealed in its Q4 conference call.

(3) Opportunistically pouncing. Those retailers that are still standing look to benefit from the massive store closures done by the industry’s weakest. Kohl’s results were “further aided by our successful efforts to capitalize on competitive store closures in our markets,” said CEO Kevin Mansell, in the Q4 conference call.

The pace of store closures is slowing a bit, but remains elevated. This year to date, there have been 2,160 store closure announcements and 1,588 opening announcements, for a 1.36-to-1 closure-to-opening ratio, according to CoreSight Research. That’s a slight improvement over the 2.2-to-1 ratio for 2017. Closures ytd were announced by Sears and Kmart (103), Bon-Ton (47), Macy’s (11), and JC Penney (8).

Toys “R” Us announced 182 store closures ytd, but the company may be about to liquidate its entire business instead of restructuring it in bankruptcy protection, said the sources for a 3/13 CNBC report. If liquidation is in the company’s future, all of its 800 stores, including roughly 200 Babies R Us stores, could be closing. Amazon, Target, Walmart, and Bed Bath & Beyond (which owns buybuy BABY) would stand to benefit.

(4) The numbers. The S&P 500 Consumer Discretionary sector has strong revenue and earnings growth to back up its healthy stock performance over the past year. Analysts forecast the sector’s revenues will grow 6.9% this year and 5.7% in 2019, while its earnings grow 16.9% this year and 12.2% in 2019 (Fig. 2 and Fig. 3). After suffering through negative net earnings revisions over the last three-plus years, the sector benefited from net positive revisions in January and February (Fig. 4). This positive news is reflected in its reflating forward P/E, which stands at 20.0. But the P/E shrinks to a much more reasonable 15.1 after Joe backs out the Internet & Direct Marketing Retail industry.

The statistics for the Department Stores industry aren’t as comforting. The industry’s revenue is expected to increase by only 0.1% this year and 0.5% in 2019. And analysts are forecasting 9.2% earnings growth this year and a 3.1% decline in earnings in 2019. While this industry also has pleasantly surprised analysts over the last two months, investors certainly should shop carefully despite its below-market forward P/E of 10.9 (Fig. 5 and Fig. 6).

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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Within the trio of department store outperformers, Kohl’s stands out for both the strongest stock performance and for reimagining ways to better use its bricks-and-mortar stores. The retailer’s stock is up 18.2% ytd and 61.0% over the past year.
retailers, survival, fittest, investors
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2018-07-16
Friday, 16 March 2018 02:07 PM
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