The Mostly Exaggerated Death of Retail — July 9, 2017
The airwaves and internet are full of news hailing the death of retail at the hands of Amazon.
Will retail look very different in 10 years? Absolutely. But that’s only part of the story. It’s not all about Amazon’s dominance.
A recent, widely publicized study found that 43% of every online dollar spent passes through Amazon, and this was considered suitable evidence that brick and mortar is on the way to extinction.
But this doesn’t account for the 86% of retail purchase activity that occurs in brick and mortar stores, nor does it account for the brands that are investing in technology to understand their customers better, streamlining operations, and widening their online opportunities.
The companies that are struggling are failing in those areas, and there is a reason for it.
It’s a four-letter word, and a curse for any business that has too much of it.
Many, if not most, of the at-risk retailers have massive debt brought on by poor management or leveraged debt they’ve been saddled with thanks to private equity deals. The debt among this group holds back their ability to invest in the changing structure of retail and allows all competitors, not just Amazon, to rip away their customers.
But these customers, and the dollars they spend, aren’t disappearing – they are just spending those dollars elsewhere and elsewhere isn’t 100% Amazon. Far from it.
Here is a comparison of sector wide equal weighted earnings in retail with Amazon and without.
The retail sector’s earnings are doing just fine whether you include Amazon or not. The difference for sector earnings is a matter of a few pennies on an sector wide basis. The EPS trend is basically identical with or without Amazon.
This tells us:
- It’s probably not good idea to be picking individual retail stocks right now unless you really know what you are doing.
- Retail sector earnings, which is what really matters, are doing fine, even with the at-risk brands losing money.
Point of fact, the sector is on sale.
* Negative P/E ratios are set to zero for clarity.
The retail sector hasn’t been this inexpensive in 6 years.
There is a lot of fear in retail right now, but despite the much-discussed trauma, earnings are motoring right along.
That isn’t to say that the sale can’t go deeper (fear can do some amazing things to stocks, as can greed) but that at some point the market is likely to wake up to the reality of retail earnings.
It might not pay to be a retail bear when that happens.
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