It appears physical stores are doing little to entice consumers through their gates, as shoppers increasingly take advantage of the on-line landscape.
To date, a strong U.S. labor market and rising levels of personal income have helped fuel healthy spending habits, which in turn has contributed to steady economic growth.
Against this landscape, consumers have turned to their digital wallets to add more goods to their computerized carts.
According to Adobe Analytics, on-line holiday spending in 2019 is set to grow more than 14% year-on-year, surpassing US$140bn, with Cyber Monday on track to chart a new record of nearly US$9.5bn, while Cyber Week could account for 20% of the total holiday season revenue.
Adobe Analytics highlighted that over 75% of U.S. e-commerce spend during the holidays is on personal items as opposed to more generic household items – smartphone shopping, for example, was touted as responsible for almost 50% of retail holiday growth.
In low income markets, spending has mainly shifted toward “something to do,” with the media and entertainment category capturing more market share than in high income markets. Meanwhile, high income cities, such as Palm Beach, Florida and Bronxville, New York, appear to be gravitating toward other types of discretionary items, including large apparel and accessories.
The activity certainly seems to have boded well for certain exchange-traded funds such as the Amplify Online Retail ETF (NASDAQ: IBUY), which offers equity exposure to global on-line retailers with at least 70% of their revenues from on-line sales.
The ETF has outperformed the SPDR S&P Retail ETF (NYSEARCA: XRT), with three-year returns of 21.45% compared to a paltry 0.75%, respectively.
IBUY includes among its top holdings exercise equipment company Peleton (NASDAQ: PTON), streaming media giant Netflix (NASDAQ: NFLX) and fintech icon Paypal (NASDAQ: PYPL), while XRT holds firms such as Game Stop (NYSE: GME), Tiffany & Co (NYSE: TIF) and Best Buy (NYSE: BBY).
Overall, while global advisory firm Deloitte expects two-thirds of consumers to begin their holiday shopping journeys at on-line retailers, with few or no physical locations, including auction sites, the in-store experience “still plays a major role,” as many shoppers “still prefer to interact with products in person.”
However, they noted that over half of shoppers plan on doing in-store research and buying on-line. “This consumer journey of mixing online and in-store for research, pricing and comparisons is now commonplace,” Deloitte added.
Market participants widely anticipate same-store cannibalism of product sales, as omni-channel options typically pit mobile swiping or desktop clicking against in-store purchasing.
Easy to Chew, But Hard to Swallow
The potential cannibalization of physical store sales due to e- and m-commerce signals that shoppers seem to prefer not only the convenience of the digital check-out and delivery processes, but also have been experiencing the ineffectiveness of the entertainment value in in-store shopping.
Indeed, current brick-and-mortar stores largely resemble giant warehouses, with employed staff mainly serving the mechanical functions of product retrieval and sales ringing. In fact, many stores seem to be stocking ever-lower levels of inventory, perhaps in anticipation of lower foot traffic for their goods, while offering instead to order items on-line for their customers.
Some anecdotal evidence suggests that it is not unusual to find abandoned registers and skeletal staff with less-than-ideal product expertise roaming the floors among larger retailers such as Macy’s.
In fact, the general lack of in-store enthusiasm may be having an adverse impact on the Macy’s brand in general, as its third quarter of 2019 comparable sales fell 3.9% from the prior year, with adjusted earnings of US$0.07 per share down from US$0.27 over the same period.
The company also reduced its full year 2019 guidance, including a drop in comparable sales of 1.0-1.5% from flat to up 1.0%, with EPS in the range of US$2.57-US$2.77 from US$2.85-US$3.05 initially.
Gimme Credit analyst Carol Levenson recently noted that the Q3 2019 sales decline at Macy’s was its “worst performance of any department store chain,” except J.C. Penney (NYSE: JCP) and matched the worst quarterly sales decline for Macy’s since 2017.
Levenson said that “for the first time we can recall, the company did not say that its digital sales were up in the double digits. Under repeated questioning” on the company’s earnings conference call, she noted that “management said digital sales had slowed down sequentially (in part blamed on web site renovation as well as a tough comparison) but were still positive.”
By contrast, Target (NYSE: TGT) had seen its Q3 2019 sales outpace street estimates, as well as its own expectations, spurring a rise in full year 2019 guidance. The results had triggered a rise in its stock of a little more than 14%.
Levenson added that contributing to the store’s stellar results was a “heavy penetration of less costly digital fulfillment options—mainly the stores—with a remarkable 80% of the 31% in digital sales growth coming from same-day fulfillment options such as Order Pick Up, Drive Up, and Shipt.”
While Macy’s stock has plummeted over 55% from its latest 52-week lows set in early December 2018 to US$15.44 intraday Monday, shares of Target have skyrocketed almost 104% from its one-year low set in late December 2018.
Given the trajectory of Macy’s dismal sales performance, it could join the trend of rising retail bankruptcies and restructurings, including recent calamities such as Barney’s, Gymboree, Diesel and Payless ShoeSource.
Moreover, on-line retailers seem to be further fueled by the gaps left emptied by store closures such as Forever 21, Sears (OTCMKTS: SHLDQ), Kmart and Toys “R” Us.
According to McKinsey & Company, U.S. retailers in 2017 and 2018 alone have vacated a quarter of a billion square feet and announced more than 6,000 store closures in August 2019 year-to-date.
The empty retail spaces certainly haven’t helped real estate investment trusts (REITs) such as Simon Property Group (NYSE: SPG) – which owns malls where store closures such as Forever 21 are growing more frequent.
Shares of Simon Property Group have plunged nearly 16.5% from its latest 52-week peak set in mid-April 2019. The REIT was also down about 1.5% intraday Monday, according to the IBKR Trader Workstation.
To compete with on-line shoppers, the physical shopping experience appears to be transforming from the traditional food court-style shopping mall to megaplex entertainment centers.
The Triple Five Group and Colony Capital (NYSE: CLNY) owned American Dream mall in East Rutherford, New Jersey, for example, boasts 450 retail shops, alongside over 100 eateries, an indoor ice rink, cinema, mini-golf course, rock climbing and bowling alley, as well as a Nickelodeon Universe theme park and DreamWorks Water Park, among other facilities.
Los Angeles-headquartered real estate firm Colony Capital, which holds a stake in American Dream along with Canadian conglomerate Triple Five Group, had seen its stock soar over 38% following the first of a four-phase opening of the mega-center on October 25.
The following three stages are set for later in 2019 and early 2020.
As physical store retailers continue to adjust to the ongoing transformation of the consumer landscape, market participants will likely be keeping an eye on how their related retail stocks, ETFs and REITs are other funds are performing in line with the changing trends.
In the meantime, investors set to receive updated retail sales figures for November on Friday, December 13 from the U.S. Census Bureau.
Disclosure: Interactive Brokers
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