How the retail life cycle hits stocks

I’ve noticed something about my shopping habits — I’m spending less money in big-box stores and buying more stuff from smaller outfits that specialize in just one or two product lines. Based on data from the retail marketplace, I’m not alone. It appears that we are in what might be called the decentralizing phase of the retail life cycle.

When we get most of what we need from a couple of large stores, our shopping is centralized. If we instead use six or eight specialty stores (or online retailers) to complete our shopping list, we are engaged in decentralized shopping. Ultimately, the way Americans choose to shop can influence the stock market.

Let me share an example from my personal life.

For the past three years or so, when I needed undershirts, I went to my local mid-price chain department store (I’ll let you guess the chain). This place strives to offer everything necessary for a life well lived — clothing, home goods, toys, small appliances, toiletries, sporting goods, you name it.

But every time I needed undershirts, they were out of my size. Every. Time. My solution: I started buying my undershirts from an online store that, get this, sells only undershirts. They always have my size, the products are wellmade, and they arrive at my doorstep in two or three days.

It was a short jump from that undershirt website to other online stores that sell products that I buy a few times a year — sites like Bonobos (men’s clothing) and Bombas (socks, just socks). Such online specialty retailers offer the same quality products as brick-and-mortar department stores and are often better about stocking a range of sizes.

My shopping shift is a microcosm of how retailing habits

can change. Sometimes consumers opt for centralized shopping (think the old Sears & Roebuck), and other times we spread our spending across many stores. How we shop depends on factors like convenience, availability, quality and efficiency.

Take grocery shopping, for example. Your great-grandmother’s food shopping trip might have included stops at a bakery, butcher shop, fishmonger, greengrocer and dry goods store. Then along came the supermarket, which has dominated food retailing for 100 years. Today, however, a growing demand for unique, quality products has fueled a resurgence of stand-alone bakeries, gourmet food stores and butcher shops.

When consumers change their shopping behavior, the stock market typically responds in kind.

Consider Procter & Gamble (P&G), maker of 70-some iconic consumer products, including Tide, Luv’s, Crest and Old Spice. The company’s shares are down roughly 20 percent year-to-date. This slide has taken place even as P&G reported earnings per share that beat estimates by $0.01, generated roughly the expected sales growth of 1.0 percent, and met its full-year earnings guidance of $4.16-$4.23.

So, what’s going on with P&G’s stock? I think the company is a victim of decentralized shopping.

Not only have online stores made shopping easier, but millennials don’t have the same level of brand loyalty that older generations have had. You typically don’t hear a 20-something say that he will use Gillette razors for life; you hear that he is a member of the Dollar Shave Club. Every triedand-true brand is facing challenges from disruptive new competitors.

Still, this doesn’t necessarily spell the end of big consumer brands. The landscape may simply look different. Case in point: Bonobos was acquired by Walmart for $310 million. Unilever bought Dollar Shave Club for a reported $1 billion. Remember Trunk Club? In 2014, it sold to Nordstrom for more than $300 million.

So, it would seem that instead of eating into profits of larger stores and brands, many of these smaller specialty retailers may become new revenue centers for these larger companies. If this trend continues, we will likely swing back toward the centralized portion of the retail life cycle.

Back to our P&G illustration, despite the current decentralized state of retailing, it is still a highly profitable company. Today, due to the drop in stock price, the dividend yield for P&G has risen to nearly 4 percent. (Reminder, as stock prices go lower and the dividend dollar amount stays the same, the percentage yield rises.)

Consider this: Since 1980, P&G has yielded above 3.5 percent about 20 percent of the time (most of the time due to a price fall). When this happens, what’s the average return over the next 12 months? 28 percent. Also, forward 12-month returns have been positive 96 percent of the time when the stock has sported a 3.5 percent-plus yield, as it does today.

Of course, history doesn’t always repeat itself, and is no guarantee of future results. However, as much as I like Bombas socks, I doubt they will put the big-box retailers out of business anytime soon.