Holiday Retail Special

361 Capital Market Commentary | December 2nd, 2019

As you wind up your Cyber Monday shopping, we thought it would be interesting to focus in on some of the current trends in retail and take a look at what the stock market is seeing in the stocks. So grab a cup of eggnog, turn on your Netflix fire log and scroll down.

First off, if you didn’t already know, this is a very short shopping season…

For the upcoming 2019 holiday season, the number of days between Thanksgiving and Christmas day are the fewest possible (at 26), which compares to 32 days between the two Holidays last year. This short holiday calendar could cause added pressure to move inventory in an already challenging retail environment.

Goldman’s Jan Hatzius sees many reasons to expect a healthy consumer…

Our model of consumer spending, which accounts for a broad set of fundamental economic and financial drivers of consumption, provides many reasons to expect solid consumption growth through 2020. The increase in stock prices should boost consumption via wealth effects, lower interest rates should boost demand for durable goods, and lower oil prices have provided a small boost to real income. Most importantly, we expect disposable income growth to remain solid as a further pickup in wage growth offsets a modest slowdown in job growth.
(Goldman Sachs)

Taking a broader global look, J.P. Morgan expects retail spending to continue slowing with global job growth…

Tweet from @carlquintanilla

But here in the U.S., consumers are planning on spending more for the 3rd year in a row…

U.S. Shoppers Plan to Increase Holiday Spending
(National Retail Federation)

The current environment looks very difficult for the average apparel-oriented mall retailer…

With 3Q results for the majority of our retail coverage behind us, we recap key trends. Overall the apparel retail landscape remains challenging. Department store and specialty retailer comps mostly disappointed, with evidence of challenged traffic, weakening trends in lower quality malls, and ongoing headwinds from tourism. Promotional activity remains elevated, with particularly competitive pricing in home and weather sensitive categories, a key driver of disappointments at gross margin. On the other hand, off price remains a bright spot.

We remain cautious on the backdrop heading into holiday. We acknowledge that November appears to be off to a decent start driven by colder weather, and that guidance has now been rebased across the group. However, we see a tough operating picture in the months ahead given the shorter holiday selling season, ongoing heightened promotions, and elevated inventories at most retailers and brands. We also highlight commentary from several retailers suggesting an absence of pricing power in several categories affected by tariffs.
(Goldman Sachs)

A sampling of the fall quarter comparable (comp) store sales reported in the last three weeks…

• Walmart comp sales at +3.2% and e-commerce sales up 41%
• Target comp sales +4.5%
• Ross Stores comp sales +5%
• TJMaxx comp sales +4%
• Macy’s comp sales -3.9%
• Gap comp sales: Old Navy Global: -4%; Gap Global -7%; Banana Republic Global -3%
• Kohl’s comp sales +0.4%. Company acknowledged that it “experienced softness during the middle of the quarter, as it saw an increasingly competitive promotional environment”. The company expects the heightened promotional environment to continue through the balance of the year.

While Dollar Tree had +2.3% comp store sales, the retailer ran into new China tariffs and other rising costs which crushed the stock…

Dollar Tree Inc. shares fell the most intraday since 2012 after the budget retailer trimmed its outlook on 2019 profit, saying tariffs on Chinese imports are driving up costs.

The company now projects full-year earnings per share of $4.66 to $4.76, down from its previous range of $4.90 to $5.11. While tariffs drove the forecast reduction, Dollar Tree also cited higher wages in its distribution centers, a global helium shortage and more sales of lower-margin items, among other issues…

Company-wide gross margin of 29.7% — down from 30.2% a year earlier — was due to higher freight and distribution costs and a rise in the sales of less profitable consumable items, primarily at Family Dollar, the company said.

(Bloomberg)

Urban Outfitters branded stores posted flat comps but the tariff threatened inventory jump also slashed its stock price…

Urban Outfitters Inc., the hipster apparel and gifts retailer, said the threat of tariffs forced it to receive items early from suppliers last quarter, contributing to an 18% jump in its inventory on the books.

The increase, by $79.9 million, was part of a disappointing quarter with flat sales in stores open more than a year in the U.S. company’s flagship chain. Urban Outfitters shares dove 12% in late trading.

(Bloomberg)

Stephanie’s tweet captures all you need to know about department store retail this holiday season…

Tweet from @SRuhle

A glance at Black Friday’s sales results show that Amazon was likely the big winner…

Looks like U.S. consumers are getting more comfortable buying online and even over smartphones. Not only are they buying more items but they are also buying more expensive items. Maybe convenience matters most for many who would rather not visit a shopping mall over the Thanksgiving holiday.

Visitor numbers across the US retail sector on Thanksgiving and Black Friday combined dipped 3 per cent from last year, according to analytics company ShopperTrak.

The findings were echoed by RetailNext, which uses a different methodology. It recorded a 2.1 per cent drop in traffic and a 1.6 per cent decline in in-store sales on Black Friday…

Amazon emerged as a big winner from the US online boom as separate figures released over the weekend by Edison Trends showed its Thanksgiving and Black Friday sales jumped 49 per cent from last year.

(FinancialTimes)

Online Shopper
(Pexels)

And not only are we more comfortable buying online, but we are also fine with buying overseas…

This live graphic shows the number of orders being made on the Shopify platform around the world by geography, value and the distance the goods will have to travel. If you have a moment to be mesmerized, click on the link.

Shopify's Sales
(Shopify)

Online retail sales growth refuses to slow down versus brick and mortar sales…

Tweet from @carlquintanilla

And less foot traffic in stores means falling rents for landlords. Even in the shopping capital of the U.S…

Manhattan-wide, rents fell an average of 8.1%. The Meatpacking District, which has benefited from tourist traffic on the High Line, was the only submarket where rents climbed.

Rents on upper Fifth Avenue had surged in recent years, pushing out many of the street’s luxury retailers whose sales hadn’t kept pace. The cost increases have leveled out a bit, Smith said. On lower Fifth, some landlords who created oversized spaces in a bid to attract major chains are now struggling to fill those stores.

(Bloomberg)

Retail Correction

Carl Icahn is betting big that the current weak brick and mortar retail conditions will continue…

The billionaire investor stands to gain $400 million or more if mall owners run into challenges servicing their debt, according to people familiar with the matter. Mr. Icahn likely is the largest short seller of mall debt, traders in market said.

The 83-year-old investor placed his bet in recent months and has suffered early losses, people familiar with the matter said.

Mr. Icahn’s trade puts him on a collision course with two of the largest money managers, including Putnam Investments and AllianceBernstein Holding LP, which are more upbeat on malls.

The face-off is “the biggest battle in the mortgage bond market today,” said Dan McNamara, a principal at MP Securitized Credit Partners, a New York hedge fund. He said the showdown is the talk of this corner of the bond market, where more than $10 billion of potential profits are at stake on an obscure index…

(WSJ)

Of course all brick and mortar retail won’t die. Barney’s may be gone, but its location is about to become a pop-up shop hotspot…

The old Barneys won’t be empty for long, though. What’s taking its place isn’t another stately, traditional luxury emporium serving the ladies-who-lunch crowd. Instead, the space will soon host four floors of pop-up shops—a trendy name for short-term stores intended to hype up customers and vanish before everyone gets bored. Pop-up shops have sprouted throughout American cities in recent years, and like many of those, the ones inside Barneys will include art installations and entertainment alongside a rotating set of designers who will sell their wares for a few weeks or months at a time. Those masterminding these abrupt appearances are all banking on the same short-term bet: People still want to shop in stores, even if what they want that store to be in six months is completely different…

In the pop-up-shop economy, place and time are as essential to success as what’s going on inside the storefronts themselves. People want to have a day out, and they want to tell their friends they bought the new print hanging in their apartment at a cute little boutique everyone else missed out on. Perhaps no one has capitalized on this better than Appear Here, a company that acts as a pop-up middleman, streamlining the process for both landlords and tenants who might not want to deal personally with frequent turnover or searching for open-minded property owners. The seeds of Appear Here were planted in 2012, when its eventual founder, Ross Bailey, wanted to lease a storefront for a couple of weeks in London to sell T-shirts and prints with cheeky images of the queen reimagined as David Bowie—the kind of idea that’s not really compatible with the five-, 10-, and 20-year retail leases that have long been the norm in major cities. Landlords kept hanging up the phone on him, he says. He tried to sell the shirts online, but business was slow.

Eventually, a landlord relented to a short-term agreement, and Bailey claims to have sold more shirts in a day in London’s Soho neighborhood than he did in a month on the internet. “Everyone is talking about how experiences are becoming the future,” he says, referring to the now-conventional wisdom that young shoppers want to do things instead of buy things. But, he realized, physical places to have these experiences matter, too. Bailey launched Appear Here in 2014, and the company now has hundreds of shop listings that can be rented for as short as a single day or as long as a few years in cities across America and Europe. The company works with giant brands, such as Nike and Coca-Cola, and celebrities such as Kanye West and Michelle Obama, but Bailey maintains that most of its clients are independent businesses.

(The Atlantic)

So let’s look at some of the better performing stocks for 2019 to give us an idea of where investors think the retail winners for the next 12 months might be. In looking at all the stocks which touch the retail space, these companies were the standouts. Not surprising that several themes emerged…

Target, Walmart and Costco…

Discount merchandise stocks continue to outperform as the American consumer is doing well and shifting their spending to these survivors who have built both brick and mortar and online fortresses. Target was the big story this year as their significant store remodel and spending plan paid off causing the shares to almost double.

TGT, COST, and WMT

Ross Stores and TJX Companies…

Average apparel retail problems lead to opportunities for these two companies who can re-merchandise all of that excess inventory. So as stores go out of business or have goods caught in trade wars, Ross and TJX can acquire the items cheap and their customers are waiting to buy them. These companies are also both exceptionally managed and their multiples reflect it.

ROST Ross Stores Inc and TJX TJS Cos Inc

Home Depot and Lowe’s…

For investors looking to invest in retail, the Home Improvement sector has remained attractive as the industry continues to consolidate and the companies continue to grow their professional builder market shares. Homeowners living in their houses longer combined with low interest rates to remodel and invest in their homes remains a tailwind.

HD Home Depot Inc and LOW Lowes Companies Inc

CarMax, AutoNation and Carvana…

Healthy consumers, low interest rates and lengthening lease terms have helped the car dealers sell new and even more used cars. While subprime auto lending is growing more hairs right now, the bulk of the lending book continues to chug along and repay even with rising delinquencies. I would not have expected these names to do as well as they have this year, but as long as job growth continues, buyers will look to spend on a new/used car.

KMS and AN and CVNA

Autozone and O’Reilly Auto…

Auto aftermarket retail is similar to Home Improvement retail in that there is not much of an online threat. Customers often need the parts immediately and they sometimes need to see and feel the good first to make sure it is a perfect fit. An aging U.S car fleet means more repairs. Both names will also benefit from the trend in global warming as higher summer temps are tortuous on automobiles while more violent weather increases the chances of hail, flooding and snow which also is good for business.

AZO and ORLY

STORE Capital Corp…

I was surprised to see a retail REIT among the list of top performing stocks. But in digging further, I found out that this REIT has less to do with owning and managing retail real estate locations and is more invested in helping customers in the services and leisure industry. So think restaurants, health clubs, childcare, and movie theaters. They do have some furniture store customers, but those are probably some of the best ones to have in retail right now. So no doubt this retail REIT is benefiting as sector investors run away from the REITs leasing to Macy’s and the Gap.

STOR STORE Capital Corp

Lululemon…

Easily one of the busiest stores that I saw in the Cherry Creek Mall this weekend besides the Apple Store. Lululemon is an expensive stock and they are crushing it. If you go into the store you will quickly find that they are not a yoga apparel store anymore. They grabbed two fists of performance based apparel and have run with it. At some point someone else will figure it out but right now, LULU is the #1 player.

LULU Lululemon Athletica Inc

Okay, so I had to take a look at the bottom of the retail list and to no one’s surprise, the big shopping mall REITs are there, lying face down, in a pool of blood, like something out of a Martin Scorsese movie.

Macerich Company and Taubman Centers

These stocks have 8% and 11% yields but that is never a reason to own a stock if the fundamentals are deteriorating. The Cherry Creek Mall here in Denver is a big component of the TCO property book. It is a very nice mall, but even so, there are many empty spaces and it has some very big tenants whose companies are in dire financial straits. There is a reason that few want to own these stocks and Mr. Icahn wants to bet against their debt. In the next recession, who will know what to do with these really big malls?

MAC and TCO

“I have spoken”…

While there are many defined trends both up and down this holiday shopping season, the only certainty is that Baby Yoda will be the hottest gift to try get your hands on. Have fun navigating the retail stock and holiday shopping season. And good luck finding your Baby Yoda.

Baby Yoda
(@Jon_Favreau: Original concept art. #TheMandalorian)

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