A perspective from E*TRADE Securities1
Thanksgiving is upon us, which used to mean a focus on turkey, pumpkin pie, and Lions and Cowboys football games. These days? It often seems more about shopping.
Is Black Friday losing its luster?
How did it come to this? The day after Thanksgiving has long marked the beginning of the holiday shopping season, and many of us still fondly recall “Day After Thanksgiving” sales. These were generally tame affairs advertised in newspaper circulars that netted a few bucks off something you were going to buy anyway.
Black Friday is a different animal altogether.
While some dread Black Friday, with its unruly crowds and chaos, others view it as a bargain-hunting tradition not to be missed. In a sign of the times, however, Black Friday has been eclipsed by “Cyber Monday,” when cubical dwellers everywhere surreptitiously take to the Internet to find can’t-miss deals. Last year, Cyber Monday generated north of $1 billion more in sales than Black Friday.1
Many retailers have become highly dependent on holiday sales, which can drive investors to base their decisions on the outlook for holiday spending, rather than company fundamentals. Given the evolving nature of retailing, this could be a mistake.
Brick-and-mortar retailing makes a comeback
With Sears now bankrupt and well-known brands like Toys “R” Us, Nine West, and Bon-Ton Stores among the growing list of retail casualties, some have questioned the future of the brick-and-mortar store format. But the data paint a different picture. According to the National Retail Federation, only 21% of consumers do their shopping primarily online.2 Deloitte reports that in-store formats are actually preferred for back-to-school shoppers, and one-third of respondents to a Deloitte survey last year said it was important that brands offer both a physical and online presence.3
Perhaps that’s why online giants like Amazon and Google are expanding their physical footprint—in some cases, significantly. In the third quarter of 2018 alone, Amazon’s physical stores recorded more than $4.2 billion dollars in revenue.4 Conversely, big-box retailers like Target, Walmart, and Kohl’s are improving their online distribution channels to better challenge the likes of Amazon.
Economic trends bode well for retail stocks
As for retail overall, the fundamentals are generally supportive:
• The National Retail Federation predicts that US retail spending will rise from 4.3% to 4.8% in 2018.5
• The Bureau of Labor Statistics reports that real average hourly earnings increased a seasonally adjusted 0.7% from October 2017 to October 2018, which should bode well for consumer spending.6
• A tight labor market with 3.5% unemployment should also augur for healthy retail sales.
Investors haven't seen much in the way of gains so far, but the holiday shopping season has only begun. The S&P Retail Select Industry Index, which gauges the performance of retail stocks, is up a modest 0.59% on the year—slightly ahead of the broader equity market. How the holiday shopping season plays out could influence the final index numbers.
Source: FactSet Research Systems. Data from 1/1/18 through 11/20/18.
The importance of dynamic distribution channels
For investors trying to make sense of it all, consider that retailers, like the goods they sell, come in many shapes and sizes. The key is to look beyond near-term consumer spending trends and focus on innovative companies that have adapted to changes in the retail environment. Some retailers are moving toward omnichannel strategies that provide a seamless customer experience across multiple distribution channels.
Some analysts believe that, ultimately, the retailers most likely to outperform will have dynamic distribution models, with the ability to leverage advanced technologies to retain market share. If you’re a long-term investor, that should matter a lot more than whether this year’s holiday sales meet or beat expectations.
For now, go out and find yourself some Black Friday door-busters if you must. But make it home safely, which is easier said than done these days. After all, Cyber Monday awaits.
1. Adobe, “Adobe Data Shows Cyber Monday Is Largest Online Sales Day in History with $6.59 Billion,” November 27, 2017, https://news.adobe.com/press-release/experience-cloud/adobe-data-shows-cyber-monday-largest-online-sales-day-history-659
2. National Retail Federation, “Consumer View Fall 2017,” October 2, 2017, https://nrf.com/research/consumer-view-fall-2017
3. Deloitte, “2018 retail, wholesale and distribution outlook” https://www2.deloitte.com/content/dam/Deloitte/us/Documents/consumer-business/us-cb-retail-wholesale-distribution-outlook-2018.pdf
4. Amazon.com, Form 10-Q, September 30, 2018, https://ir.aboutamazon.com/node/32156/html
5. National Retail Federation, “NRF forecasts holiday sales will increase between 4.3 and 4.8 percent,” October 3, 2018, https://nrf.com/media-center/press-releases/nrf-forecasts-holiday-sales-will-increase-between-43-and-48-percent
6. Bureau of Labor Statistics, “Real Earnings—October 2018,” https://www.bls.gov/news.release/pdf/realer.pdf