There’s no point denying it: retail stocks have generally suffered a tough stretch in 2017. Foot traffic is down in major shopping centers, causing pain not only to individual brand names, but to the landlords that lease out the properties. As a result, while the benchmark S&P 500 index is up 16% year-to-date, the SPDR S&P Retail (ETF) (NYSEARCA:XRT) is down nearly 6%.
Of course, the standard culprit is Amazon.com, Inc. (NASDAQ:AMZN).
Just released data from the U.S. Federal Reserve indicates that e-commerce sales represent 9.1% of total retail revenues. Save for some catastrophic, doom-and-gloom event, this allocation will only rise higher from here. But more importantly, e-commerce has actually never suffered a decline in sales as a portion of total retail.
The message is clear. For retail stocks to survive, they must either have their own e-commerce channels or an effective answer. Given the number of catastrophic losses suffered in the markets, this sector doesn’t have too many heroes.
But as gloomy as prospects appear to be, some companies have accepted the challenge and have forged viable solutions. They have not yet conceded to Amazon’s hegemony in all matters, and the markets are responding positively to their strategies.
Here are two retail stocks that will make Santa’s nice list, and two that will receive a lump of coal.
Retail Stocks on Santa’s Nice List: Gap (GPS)
The last few years have not been welcoming for apparel retailers, especially for trendy fashionistas targeting upwardly mobile Millennials. The new wave of young consumers didn’t buy into brand-name marketing like their predecessors; in turn, this dynamic hurt companies like Gap Inc (NYSE:GPS). Indeed, GPS stock lost a horrific 40% in 2015, and analysts can be forgiven for casting aspersions.
Despite many obstacles facing retail stocks, Gap’s management team trudged on and were finally rewarded this year. So far, GPS has gained more than 33%. A better-than-expected third-quarter earnings report helped catapult shares recently. More importantly, I don’t believe this is a flash-in-the-pan event. The trendy apparel sector is learning the tough lessons of 2015 and 2016, and using them to thrive moving forward.
In addition, InvestorPlace contributor Laura Hoy listed several reasons why GPS can complete their turnaround. These include improving financial metrics and investing in their online sales channels. Moreover, management is listening to the customers. They want low-cost items and athletic wear, and Gap is focusing especially towards its Old Navy and Athleta stores.
Finally, GPS is somewhat shielded from Amazon’s competitive strikes. Clothing is difficult to ascertain from a website, no matter how many pictures are involved. Even in the age of digitalization, you still need to physically fit yourself. Therefore, a strongly led apparel store still has a great chance of being relevant.
Retail Stocks on Santa’s Nice List: Big Lots (BIG)
Thanks to Costco Wholesale Corporation‘s (NASDAQ:COST) enormous success, warehouse club-style shopping has become an American past time. Nevertheless, merely operating one doesn’t guarantee you easy money. A quick glance at Smart & Final Stores Inc (NYSE:SFS) tells you all you need to know. Still, Americans love discounts, providing plenty of opportunities for well-run stores like Big Lots, Inc. (NYSE:BIG).
Like other retail stocks, BIG dealt with rough waters over the last several years. However, the worst of the choppiness appears to be over. On a YTD basis, BIG has only gained 9%: that’s hardly exciting, considering that the aforementioned S&P 500 index is up double digits. Nevertheless, consumer sentiment is still flat for two-and-a-half years. That tells me that customers still want and need their discounts, and Big Lots will be all-too-happy to oblige.
Furthermore, Big Lots stores sell virtually everything, especially furniture. This retail subsector is something that you’ll want to pay close attention to. This year, furniture sales in the U.S. finally exceeded their 2007 peak. Better yet, revenues are improving. That also tells me that while customers are wallet-tight on discretionary items, they want to spend on important home furnishings.
While BIG stock had an average outing in 2017, it could be setting up for a stellar 2018.
Retail Stocks on Santa’s Naughty List: Target (TGT)
Usually, most people understand the first unspoken rule of business: don’t talk about politics. The second rule is similar, which is, don’t talk about politics! But if you must talk about politics, you should do so using non-confrontational and ambiguous language. Going too far to the left or the right risks alienating virtually half of your customer base. Unfortunately, someone forgot to tell Target Corporation (NYSE:TGT) CEO Brian Cornell.
Cornell’s first mistake was thinking that the Democrats were the “good guys.” He implemented a transgender bathroom policy that riled conservatives and people who thought women are women, and men are men. Rather than being quiet and not committing an unforced error, Cornell made TGT all about him and his political views. In turn, that caused a boycott signed by more than 1.5 million people.
Is 1.5 million customers going to make a difference at TGT? Perhaps not. But as our own James Brumley points out, Target has enough problems facing down Amazon and Wal-Mart Stores Inc (NYSE:WMT); why cause more (and unnecessary) challenges?
I don’t hate TGT stock because it’s a poor performer. Stuff happens. I get it. I hate TGT because Mr. Cornell is arrogant and selfish. He damaged the Target brand, and caused financial hardships for TGT shareholders. At the very least, Cornell should lose his job.
Retail Stocks on Santa’s Naughty List: Williams-Sonoma (WSM)
Oh, Williams-Sonoma, Inc. (NYSE:WSM)! Nothing spells entitled brat or vapid hipster quite like WSM. However, I mean this in a good way. When retail stocks are hurting, the logical hedge is to go for the affluent. The thinking, of course, is that the poor will be the first to save their money, while the rich have the resources to maintain their spendthrift habits.
Sometimes, though, it’s the poor that spends and the rich that tighten up the fort. Consider for example the meteoric rise of Ollie’s Bargain Outlet Holdings Inc (NASDAQ:OLLI), which I profiled earlier this year. They kept their business strategy simple — provide great products at great prices. Now, look at companies like Nordstrom, Inc. (NYSE:JWN) or Dillard’s, Inc. (NYSE:DDS). Upscale brands are no longer reliable money makers.
But with the recent slip in WSM stock, isn’t this a great time to pick up shares? I have my doubts. Although home furnishing revenues are up, overall consumer sentiment is flat. Customers therefore still want discounts — not cheap Chinese products repackaged (and repriced) as luxury American goods.
From their latest earnings report, I’m also worried about their rising inventory levels. While they met their earnings targets, management is also exaggerating their forecasted demand. I think the markets are looking for any excuse to dump retail stocks. Since WSM is only capable of meeting expectations, and not exceeding them, Williams-Sonoma is a risky proposition.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.