From Invesco: Most will agree that one of the biggest casualties of the internet economy has been traditional retail. Anecdotal evidence abounds, and the numbers don’t lie either.
Within the S&P 500 Index, multi-line retail companies (primarily department stores and dollar stores) have underperformed the overall index on a cumulative basis by 45 points over the past five years, with specialty retail (includes companies like auto parts retailers and apparel stores) off by 20 points over the past two years. What is the prognosis for retail, and are there any promising investments left?
Changing consumer behavior
As a portfolio manager with Invesco Growth and Income Fund, I agree that it has been difficult to find any good buys in the retail industry. There are several reasons for this:
- During and after the Great Recession, consumers began spending less and saving more. People are now smarter consumers and know how to dig for deals.
US savings rate percentage, year-end 1998 through year-end 2016
- Another trend we see is what might be called “experiences over goods.” Many consumers are now more likely to seek experiences like vacations rather than to buy new furniture or vehicles. This can be seen in continued growth in leisure travel.
- Consumers also prize convenience, which is exemplified by the growing number of shoppers who use Amazon (0.00% of Invesco Growth and Income Fund as of Sept. 30, 2017) — and take advantage of free “Prime” shipping.
Discretionary spending is getting squeezed
Even though equity market indexes continue to make new highs, this recovery is quite different from those in the past. One problem for consumers is anemic wage growth. Based on previous expansions, we would expect wage growth to be much more robust at this point in the business cycle. As a result, there is less to spend at traditional retailers.
Another issue squeezing the wallets of consumers is health care. While not a new problem, the continuing long-term trend of employers shifting more health care expenses to employees — through higher deductibles, co-pays and rising premiums — is certainly a financial concern. These costs are mostly inelastic and, as such, must be taken from other components of the family budget.
Amazon vs. traditional retail
As if skittish consumers weren’t enough of a problem for traditional retailers, then add more competitors to the mix. Increasingly, consumers (especially millennials) are treating shopping as a multi-channel endeavor. Traditional retailers are still one of the channels but are increasingly losing out on transactions as customers enjoy the convenience of online shopping. Amazon is freeing customers from more routine shopping trips and giving them back their time. Although Amazon has a market cap of nearly half a trillion dollars, the company is still fairly young in its corporate life cycle. When compared to Walmart’s growth over the years, we believe Amazon is only in the “third inning” of its growth. It is also hugely popular — the company doesn’t release figures, but it is estimated that 64% of US households are Prime members1, an amazing statistic even if exaggerated. When you consider that Amazon can deliver virtually anything (from the mundane to the exotic) as often as you like in 48 hours or less for $99 annually, it is obvious that only the largest and strongest competitors have a chance at matching this logistical feat.
So how was Amazon able to build this formidable infrastructure? The simple answer is investors have never held Amazon to the same performance standards as brick-and-mortar retailers. The vast majority of public companies must consider metrics such as profit growth and return on invested capital. Many also need to consider share buybacks and dividends. Not Amazon; the company has been able to continuously reinvest cash in its business to improve its technology, expand distribution capabilities and offer lower prices. Amazon is not slowing down, either. Capital expenditures, primarily for increased distribution capabilities, have more than doubled over the past five years.2 Amazon is also not bashful about entering new segments, as evidenced by its recent purchase of Whole Foods.
What we like
Clearly, it is a tall order for a traditional retailer to try and go toe to toe with Amazon. We don’t see much value in traditional retailing, and haven’t for some time. However, we are believers in companies that can sell “experiences” like Carnival (1.88% of Invesco Growth and Income Fund as of Sept. 30, 2017) and companies that have strong “self-help” opportunities like General Motors (1.72% of Invesco Growth and Income Fund as of Sept. 30, 2017).
Please visit our website to learn more about the Invesco Growth and Income Fund.
1. Source: Forbes.com, “Sixty-four percent of US households have Amazon Prime”, June 17, 2017
2. Source: Amazon corporate website, data from the year ended June 30, 2017 as compared to calendar year 2012
Blog header image: Itsra Sanprasert/Shutterstock.com
Holdings are subject to change and are not buy/sell recommendations.
Capital spending (or capital expenditures, or capex) is the use of company funds acquire or upgrade physical assets such as property, industrial buildings or equipment.
Return on invested capital (ROIC) is a measure of how efficiently a company is using its capital to generate returns.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
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A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.
The SPDR S&P Retail ETF (XRT) was unchanged in premarket trading Friday. Year-to-date, XRT has declined -6.84%, versus a 15.41% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Invesco.