The TV this week has been filled with analysts gushing over the retail recovery.
Many big retailers have reported big results. Walmart (NYSE:WMT) popped nearly 10% on Aug. 16 after reporting its numbers. Target (NYSE:TGT) has gotten a nearly 3% boost. Home Depot (NYSE:HD) briefly hit $200 per share after earnings. Macy’s (NYSE:M) is up nearly 50% on the year so far.
Even cynical me got into the groove, praising Nordstrom (NYSE:JWN) as it “fights the ugly”, the trend of people my age to appear in public wearing t-shirts and cheap shorts. It’s not a good look.
But does this mean the fear of Amazon.Com (NASDAQ:AMZN), one that has kept retailers down for so long, is overdone? Does this mean, as analysts seem to think, that happy days are here again for the sector?
Not necessarily.
Happy Days?
There is a growing consensus on Wall Street that the tax cut is putting the recovery into overdrive, and that people have more money in their pockets.
Wages are growing, but not when adjusted for inflation. Since the start of the year, according to the Bureau of Labor Statistics, real wages are up just .1%.
What has happened is that homes have become unaffordable. Rising interest rates, combined with slack supply, means many people are just giving up on getting a place of their own.
Combine the wealth effect of people who do own housing, and the give-up of those who can’t get it, and you have a lot of money that can go into other things. What we’re seeing isn’t growth, but displacement.
This displacement is not lifting all boats. Sears Holdings (NASDAQ:SHLD) is still dead. JC Penney (NYSE:JCP) remains a no-go zone (sorry Shaq). Lowe’s (NYSE:LOW) is still not beating Home Depot.
But the S&P Retail ETF (NYSEARCA:XRT) is up 13% since the start of the year, twice the gain of the S&P 500.
Retail has been a good trade.
The Trend Remains
People who think the recovery is strengthening are simply wrong. They’re being misled by inflation, by the bust in housing affordability and by wishful thinking.
Beyond the recent good news for retailers are the same trends that existed last year. Online competition is still increasing. Most people like the way they look, even when it’s horrible. The economic future remains murky.
There are some retailers I can recommend heartily. Kroger (NYSE:KR) is up 50% since March, but still sells at just 8 times earnings. I like CVS Health (NYSE:CVS) because its merger with Aetna (NYSE:AET) makes sense and because its clinics take cost out of routine health care. I like Nordstrom and wish it well getting people like me to buy good stuff.
Cutting costs to consumers, using online tools for supply chains and marketing and focusing on essentials instead of mere fashion are still vital to retail success, as they have been throughout the decade. Companies that get this right are good long-term values, and those that rise because of short-term factors are good candidates to sell.
The Bottom Line on Retail Stocks
No industry has been impacted as profoundly by clouds and devices as retailing. Companies that failed to automate their supply chains are suffering, as are those that don’t use the new tools of sales and service intelligently.
Few industries will be impacted as much by the trends toward robotics and autonomous cars as retailing.
What this tells me is that size will continue to matter, for investors. Small retailers will need to be online retailers, like Stitch Fix (NASDAQ:SFIX). Otherwise, focus on those with the health and systems to compete head-to-head with Amazon. Don’t overpay, and don’t chase those which benefit from short-term trends like those of the last quarter.
Look forward.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
