ALL EYES ON OLD-GUARD RE­TAIL­ERS

But firms that ped­dle stuff di­rectly to buy­ers may no longer be true mea­sure of con­sumer health

New Straits Times - - Business -

AGLANCE at the United States stock mar­ket’s main mea­sure for the health of re­tail­ers sug­gests all is well among those firms in the busi­ness of ped­dling stuff di­rectly to con­sumers.

Af­ter all, the US$1.16 tril­lion (RM5.03 tril­lion) S&P 500 re­tail in­dex has climbed nearly 13 per cent this year to a record high, roughly dou­ble the seven per cent gain by the full S&P 500.

That stal­wart per­for­mance, how­ever, has been de­liv­ered al­most en­tirely by a clutch of new “re­tail­ers” that now ac­count for more than half of the value of the in­dex: Ama­zon.com, Net­flix and Price­line Group. More­over, it masks a broad slump in shares of tra­di­tional re­tail­ers hav­ing their lunch eaten by dis­rupters like Ama­zon in par­tic­u­lar.

In fact, when the re­tail in­dex’s big three gain­ers are ex­cluded, the group’s ag­gre­gate value has gained a lack­lus­tre 1.3 per cent this year and is some eight per cent shy of its high-wa­ter mark two years ago.

Against that back­drop, this week brings a fresh look at how that old guard of re­tail is hold­ing up and whether a turn­around in their flag­ging share per­for­mance might be in the off­ing.

First-quar­ter earn­ings re­ports from Macy’s Inc, Nord­strom Inc, Kohl’s Corp and JCPen­ney Co Inc are ex­pected to be sober­ing, but could shed some light on whether wrench­ing turn­around plans launched by some of them, in­clud­ing thou­sands of lay­offs, are start­ing to bear fruit.

Over­all cor­po­rate earn­ings for first quar­ter have been strong, with growth for the en­tire S&P 500 pegged at 14.7 per cent from a year ear­lier, the best since 2011, ac­cord­ing to Thom­son Reuters data. But the con­sumer dis­cre­tionary sec­tor, which in­cludes the depart­ment stores, is ex­pected to show just 3.9 per cent growth, al­beit that is up from an es­ti­mated 1.4 per cent a month ago.

But sales are ex­pected to be mid­dling for the depart­ment store chain names. An­a­lysts cau­tion, how­ever, that tra­di­tional re­tail­ers may no longer be a true mea­sure of con­sumer health as peo­ple have new ways to spend.

“There will prob­a­bly be a knee­jerk re­ac­tion the wrong way when we hear some of those larger re­tail­ers come out and say foot traf­fic in the mall is ter­ri­ble,” said Art Ho­gan, chief mar­ket strate­gist at Wun­der­lich Se­cu­ri­ties, here.

“Hope­fully we don’t start as­sum­ing that be­cause peo­ple aren’t go­ing to Macy’s the con­sumer is dead.”

Far from it. The govern­ment’s main mea­sure of the health of con­sumer spend­ing, the monthly re­tail sales re­port due out on Fri­day, is ex­pected to show over­all re­tail sales snapped back last month af­ter two straight de­clines.

Of the big four re­tail names set to re­port this week, only Nord­strom is fore­cast to post an in­crease in earn­ings per share, and that by just 2.8 per cent, ac­cord­ing to es­ti­mates from Thom­son Reuters I/B/E/S.

Macy's profit per share is seen slid­ing 13.5 per cent and Kohl’s is ex­pected to drop 6.4 per cent. JCPen­ney, which posted its first quar­terly profit in three years in last year’s fourth quar­ter, is seen slid­ing back to a loss.

“There’s a lot of head­line risk at­tached to re­tail­ers so we’re not a big fan of own­ing a lot of the brick and mor­tar mass re­tail­ers right now,” said Nathan Thooft, se­nior man­ag­ing di­rec­tor, at Man­ulife As­set Man­age­ment.

In­deed, all four of those re­port­ing this week have lagged both their own peer group and the wider mar­ket so far this year.

While Nord­strom is at least in the black with a mod­est two per cent gain, Macy’s and Kohl’s have both tum­bled about 19 per cent. JCPen­ney, no longer a mem­ber of the S&P 500 re­tail group, has plunged 34 per cent.

As Thooft puts it: “The val­u­a­tions are start­ing to get in­ter­est­ing, but at the same time you can’t dis­miss the fact you have the Ama­zons of the world and the shift of the con­sumer to be able to pur­chase more and more items on­line.” Reuters

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