Lately there doesn’t seem to be anything except bad news for investors when it comes to retailers.
Well-known retailers, including Sears (SHLD), The Gap (GPS) and Macy’s (M), all saw their shares get pummeled this week as they reported profits drying up because shoppers are shifting dollars to online retailers as they look for deeper bargains on apparel. Shares of these stocks are down 45%, 28% and 11%, respectively, just this year causing some investors to question the viability of malls and department stores.
And it’s not like investors are overreacting. There are some serious fundamental reasons for the pressure. For instance, Sears posted a $580 million loss during the first quarter, which is nearly four times what it lost in the same period a year ago. The Gap’s adjusted first-quarter profit came in as expected, but unfortunately that was 24% less than what it earned in the same year-ago period. A massive 44% earnings miss by Nordstrom (JWN) this week and a 29% quarterly drop in profit at Macy’s also served as a reminder that consumers are changing their patterns quickly.
“The department store business is getting increasingly more challenging due to more competition (especially Amazon), technological advances allowing greater pricing transparency for customers and changing customer preferences to spend less on apparel on more on experiences,” according to Oliver Chen, analyst at Cowen in a note to clients.
It’s not that consumers have suddenly lost their urge to shop. Despite the enormous pressure on department store operators, the S&P 500 retailing industry index (RLX) is down just 0.2% this year – not all that a bad considering the entire S&P 500 is up just 1%. During the past 12 months, the S&P 500 retailing index is up nearly 12% – blowing away the nearly 2% decline by the S&P 500.
Consumers are simply shifting their spending. Specialty retailers continue to work. The best performing retail stock in the Russell 1000 is craft supply seller Michaels (MIK), which is up 29% this year and 8.2% over the past 12 months. Online retailer titan Amazon steals market share from bricks-and-mortar retailers at an impressive pace. The company is now the seventh most valuable company in the S&P 500 – as the stock has soared 67% over the past 12 months and adjusted first-quarter profit soared to $1.07 a share – after being in the red a year ago.
It’s too soon to pronounce the death of department stores, Chen says. “This setback is a setup for a comeback at some point, hopefully,” he says. But there are shifts in consumer behavior that are permanent, says Bridget Weishaar, analyst at Morningstar. That means consumers are putting value over brand, willing to spend more on experiences than on apparel and the “shift in distribution channel toward digital will persist,” she says.
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