It’s getting grim in retail. Will a Trump White House help?
U.S. retailers are suffering from decreased foot traffic and anemic sales, causing turmoil in the industry. Big-name stores are closing store locations, and last year’s mediocre holiday shopping season was a prelude to weak earnings reports so far this year.
Still, a slight rise in retail sales in April shows that consumer neglect of the sector may not be permanent.
Will Americans spend more at retail stores if they have a little more money in their pockets?
Donald Trump’s tax reform plan promises to do just that. In fact, he estimates that more than 30 million households would save approximately $1,000 per year on their federal tax bills. If Americans decide to go shopping with that windfall, retailers will see profits rise considerably.
Here are four retail sub-industries—and some well-known examples from each—that could benefit from an injection of consumer cash: Internet, home improvement, department stores, and hypermarkets and super centers.
Online sales are exploding, and Amazon is the clear leader in this sub-sector. The ecommerce giant grabbed nearly 42% of all Internet sales in the last two months of 2015, whereas 10 other retailers combined shared a measly 25%.
Internet retail reported earnings growth of over 140% from the year ago period, while several other sub-industries showed negative growth. Department stores have been particularly hard-hit by the growing popularity of e-retailers, and complain bitterly of the so-called Amazon effect.
Amazon’s success is a compilation of several different business sectors. Its successful Amazon Web Services is a huge profit maker for the company, and the company is now launching Amazon Business, an enterprise version of its popular online marketplace.
Third-party merchants have fueled the growth in Amazon’s marketplace over the past few years. Last fall, analysts noted that more than 80% of products offered on Amazon were sold by merchants other than Amazon – and that the company’s Fulfillment by Amazon service has been instrumental in its expansion.
Also contributing to Amazon’s popularity is the Amazon Prime program, whereby members pay $99 annually for free two-day shipping and other perks. The service works so well that Prime members tend to shop more often on Amazon than non-members – and, assumedly, less often at other retailers.
Home improvement retailers enjoy rising sales this year, as home prices climb and consumers continue to spend money on their houses and yards. Home Depot recently reported a year-over-year increase of nearly 22% in online sales, though 40% of Internet orders are picked up at the store.
The biggest contributor to HD’s bottom line is its Pro customer base, a small group that’s responsible for 40% of the company’s sales.
Lowes narrowly beat Home Depot in first-quarter, U.S. same-store sales, a 7.5% increase compared to HD’s 7.4%. Management noted on the earnings call that online sales surged nearly 24% for the quarter, as well.
The department store sub-sector has seen the most trauma, watching its earnings drop almost by half over the past year. Why do these iconic American retail stores suffer so?
Some analysts think the sub-sector simply has too many stores in an age when consumers are becoming more comfortable with online shopping. In addition, many are too slow to develop their Internet presence.
Consumers still spend money on clothing, but shy away from big department stores in favor of off-price retailers like TJ Maxx and Marshalls, owned by the TJX Companies (NYSE:TJX). Unfortunately, department stores have less than stellar results from their own forays into discount apparel, and many are slowing expansion into that segment.
Hypermarkets and super centers experience a decrease in earnings year over year as well, though not as severe as department stores. Costco’s second quarter earnings report showed a miss on both earnings and revenue, while Target missed on revenue only. Walmart beat expectations on both counts, though its EPS of $0.98 was down from its year ago earnings of $1.03 per share.
Both Target and Walmart acknowledge the need for a better online presence. Target recently appointed a new chief digital officer in an attempt to improve its digital shopping unit, and Walmart management is ramping up its online offerings.
Best Bets for Investors
Consumers with more money to spend will likely gravitate toward retailers they already patronize, namely Amazon, Home Depot, Lowes, and TJ Maxx. These stocks practically guarantee to benefit investors when consumers have extra money to spend.
Department stores are a lousy investment, at least for the near future. Amazon is battering this sub-sector, and analysts see the online giant overtaking stores like Macys in apparel sales within the next 12 months. The CEO of the Gap (NYSE:GPS) even suggested using Amazon to gain more exposure for his company’s apparel.
Though the hypermarket and super center sub-sector is bruised; it’s worth keeping an eye on. Walmart’s focus on grocery items could help boost its bottom line. And its commitment to improving its online store should give the company a hedge against Amazon.
Target’s management noted that consumers are spending money on their homes rather than their wardrobes. If the company starts taking space away from apparel and dedicating it to home goods, investors will take notice.
Importantly, Costco’s pricing is remarkably similar to Amazon’s. A recent shopping experiment showed savings for the Costco buyer when an identical cartful of goods was purchased from each retailer.
When it comes to investing, due diligence is a necessity. Whether or not Trump’s tax reforms become a reality, many of the above-mentioned companies have the ability to navigate the changing retail landscape. They’re good investments regardless of who wins the White House.