Dying retail: Investment strategy 'checklist'

 

 

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Dying retail: Investment strategy 'checklist'

Retail as we have long known it is dying.

For investors, a portfolio shuffle may be in order.

The department store ruled our shopping experience since the late 18th century when it first appeared in London.

Up until then, consumers had to visit a variety of separate establishments to do their shopping — the shoemaker, the haberdasher, the milliner, the dressmaker, etc. It could be time-consuming and physically demanding.

The convenience of having all the shops under one roof and one management caught on quickly and grew rapidly into the department stores and malls of today.

The department store was born of the Industrial Revolution, which created vast new wealth and a new consumer market — the middle class — which had more money to spend and a desire to enjoy a better standard of life. The department store fulfilled those desires. The rise of the shopping mall anchored by one or more big department stores accelerated the suburban migration from the central city.

I well remember the old Sears & Roebuck, which was the icon of consumerism in America. It was an exciting adventure for many, visiting the store downtown, smelling the wonderful aromas of new clothes with a hint of sweet fragrance drifting over from the perfume counter and marveling at all the amazing goodies there.

And for the times in between visits to the store, there was the Sears & Roebuck catalog filled with enticing treasures that could be ordered by mail and delivered right to your door. The catalog embodied the American Dream as manifested in consumer goods. (In rural areas, it also often served a useful purpose in outdoor johns.)

Today there are only 41 Sears retail stores operating in the United States with 11 of those in California.

The list of large retailer brands closing stores (or that have already closed some) runs long and is stretching longer. Bath & Body Works, Macy's, Walmart, and Big Lots are among the chains shutting down stores. Bed Bath & Beyond is planning to close 416 locations.

JoAnn Fabrics, Party City and Rite aid will all probably be gone by the end of the year. Yes, strip malls are still being built, and there is an inordinate number of mattress stores on seemingly every corner... but despite that, big retailers are an animal that seems to be going extinct.

So what exposure should the average investor have?

Change of habits

The reasons for the decline of the big retailers are complex. The knee-jerk analysis holds that it's Amazon's fault. It's true that consumers love the convenience of point-and-click shopping online, and e-commerce is stealing a huge share of the retail market. But that's an overly simplistic answer. You can't try on a pair of pants at Amazon to see if they fit or look in a mirror to see if the color of a blouse complements your complexion.

Besides, some brick-and-mortar retailers already offer e-commerce "omni-channel" shopping where customers can buy online and pick up the items in the store, or encourage "showrooming" where customers can try clothes on in the store, then buy them online. Department stores now derive 15 percent to 25 percent of their sales online.

Part of the problem for the big retailers is a change in consumer shopping habits. People spend more on technology these days and have less to spend on clothes. The shopping mall culture is fading as young people who used to "hang out" at the mall now do so in social media. Discounts stores like TJ Maxx take a bite from the traditional retailers, who are themselves engaged in a "race to the bottom" to offer cut-rate promotional prices every day instead of just for special sales events, thus cutting into profits.

The big box itself turns off shoppers who have less patience with roaming around acres of retail space to find what they're looking for when they can pop online without moving from their sofa to buy the merchandise. The big department stores also tend to carry much the same merchandise — not just the same type of goods but even the same brands. According to consultancy AlixPartners, traditional middle-of-the-road department stores have a 40 percent merchandise overlap — meaning they carry the same stuff.

Local department stores no longer differentiate by offering goods appealing specifically to consumers in their community because consolidation of the stores has centralized merchandising management, resulting in "management by spreadsheet" without regard to localized preferences.

Then there's the fact that the little restaurants of the shopping mall food courts discovered they could do better business as "food trucks" and not bother with paying rent or having furniture. The smaller shops of the malls found they could move into lower-rent strip malls. Chain retailers flooded the markets with thousands of tons of consumer goods that thrift stores sell used and, therefore, no one needs to go get this stuff from the chain retailers anymore.

In a word, what is happening is a free market is coming into existence right under everyone's noses and few see it.

The economy is not tanking. It is changing. And to some people, it will look like it is collapsing. And it is — for them. For them, and the people that rely upon them, it will be a disaster and they'll lose these figments of their imaginations they call "fortunes." But the wealth does not just disappear. It changes forms.

Reinvest in retail?

Investors have followed shoppers out the door. But whether you prefer the real department store shopping experience or the virtual online experience, I suggest you take a careful look at your investment portfolio to see if adjustments are needed with regard to retail stocks.

That's not to say you should automatically dump all retail stocks. But you certainly want to look at those old standbys you've held forever and do some housecleaning. It's a stock-picker market in retail stocks, and passive buy-and-hold strategies could cost you.

Retailers in home improvement, like Home Depot and Lowe's, that have strong performance, are not growth stocks any longer, yet are at decent valuations are equities to look into. You'll want to look at the big online retailers like Amazon, of course, but also the infrastructure companies that allow online shopping payments, for example, like Shopify, or shipping and logistics companies. These are just ideas to consider, not recommendations. We do not run a trading service, and we do not know your specific investment needs and goals.

Still, you can evaluate your own risk tolerance and investment desires with the advice of tech and consumer goods specialist Leo Sun, writing for The Motley Fool, who offered his eight-point checklist for investing in retail stocks:

1. How do its comparable-store sales measure up?

2. How many stores is the retailer opening and closing?

3. Does it have a meaningful e-commerce presence?

4. Are inventories rising too quickly?

5. Are gross margins holding steady as revenue rises?

6. Have you visited the stores?

7. Do you understand the competition?

8. Is the stock expensive relative to its industry peers?

There's still money to be made in retail stocks, but you'll need to be conscientious about doing your homework.

Yours for the truth,

Bob Livingston
Editor, The Bob Livingston Letter^®

NOTE:  I grew up as a ‘mall rat.’  Inside shopping centers were a dream for us kids especially during winter months.  Our 1^st mall had a bowling alley/pinball & pool tables in its basement.  As I ready this piece for post I read of big layoffs at Amazon, Facebook & more than 220 Brger Kings in MI are closing…

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