It’s been a tough year for the retail sector; apathetic customers, shrinking sales and the threat of e-commerce have led to smaller profit margins at brick and mortar stores, driving stock prices down.
But the tide is turning and retail stocks could see a short-term increase this winter as companies wise up to the market, tighten their inventory levels, implement new sales strategies, and bet on more favourable weather.
Since the start of the year, the S&P 500 retailers index rose 0.89 percent compared with a 7.70 percent gain in the Standard & Poor’s 500 index. Though retail is still underperforming the market, the index has risen by 13.10 percent since it hit its lowest point in February this year.
Some retail analysts are encouraging investors to buy stocks in Nordstrom, JC Penney and Macy’s as these companies start to address industry issues and make tactical changes.
But it’s not the case for all retailers.
“It’s an iffy market for Kohl’s and Sear’s as consumers are now choosing to go more upmarket, which is why we see strong results from Macy’s and Nordstrom,” said Ivan Feinseth, chief investment officer at Tigress Financial Partners.
Macy’s stock was up 1.95 percent in September and had climbed by 23 percent at the end of September from its lowest point in May. Nordstom was up 43 percent in the same period and1.67 percent in September.
“Some retailers have gone into the back half of this year with cleaner inventory levels. Last year they over ordered and were too optimistic about performance,” said Bridget Weishaar, senior equity analyst at Morningstar.
Inventory is one of the highest costs for retailers; it’s capital tied up in unsold goods, which could be invested elsewhere, rather than eating away at already thin margins.
Macy’s second quarter inventory levels were down 3.2 percent this year, Kohl’s aims to lower theirs by 10 percent at the end of next year. By doing this, they will improve margins and drive up stock prices.
The inventory issue last Christmas was closely tied to unseasonably warm weather in November and December. Macy’s stock plunged by 32 percent in these two months, partly because they were unable to sell the vast proportion of their winter clothes. This year, with colder weather forecasted, the market is expecting better results. The National Retail Federation said Tuesday that it is expecting total retail holiday sales to increase 3.6 percent to $655.8 billion this year.
Stores are also looking at other ways to improve profitability. In their second quarter earnings, Macy’s announced that it will be closing 100 of their least profitable stores in 2017. Though they anticipate losing $1bn of sales from these stores, by pruning these unproductive areas they are hoping to improve sales productivity overall. Sear’s and JC Penny are doing the same on a smaller scale.
Other stores are expanding their online platforms and offering new products to bring in customers. JC Penney has opened Sephora beauty shops in select stores and is expanding its private label collection, which has higher gross margins so will become critical to future share gains. This has made the company a more attractive investment.
“We didn’t recommend the stock (JC Penney) before. What we liked is their private label position,” said Steve Ruggiero, analyst at RW Pressprich & Co.
Retail stocks trade on sentiment and if investors see signs of improvement, whether it’s new product offerings or better management, sentiment is likely to improve. For these battered stocks, the upsides are significant as they are priced low and offer good investment opportunities.
But analysts aren’t necessarily betting on this sector of brick and mortar retailers long-term. With e-commerce growing exponentially and amazon elbowing its way into apparel, brick and mortar stores continue to face on-going pressure to keep up.
For now, the market is waiting to see if Christmas fairs them well.
“I am optimistic, I am looking forward to the holidays; overall it will be a better season for everyone,” said Feinseth at Tigress.