Future of Retail: Is the Rebound Real?
By: Steve Smith
Remember way back in June when Amazon (AMZN) initiated its takeover of Whole Foods, and the rest of the retail world shuddered in fear? It seemed as if the future of retail had been thrown into question overnight.
Shares of companies such as Kroger (KR), Costco (COST), Target (TGT) and even Wal-Mart (WMT) all dropped some 10% or more that day. The top 15 grocery/food retailers lost some $40 billion in market cap that day. Not only was that loss was more than twice the $13.8 billion Amazon was paying for Whole Foods, but Amazon shares themselves gained some $15 billion.
All told, it represented nearly $100 billion re-allocation of capital with all the spoils going to Amazon, which was presumed to be the sole winner and survivor in the quickly changing retailing landscape. Remember that department stores such as Macy’s (M) and Kohls had already lost some 60% or more of their value over the prior year.
But a funny thing has happened on way to the apocalypse. Not only have most of the above names survived, but some are thriving.
Others whose shares have enjoyed a recent rebound might be setting up for a sale or shorting opportunities.
The 2 Big Winners
Shares of Walmart not only quickly recovered, but have gone on to make new all-time highs thanks to aggressive online initiatives. I think the shares can continue moving higher in 2018.
Costsco’s shares took a few months and a couple of earnings reports to prove that its membership model, low prices and ‘treasure hunt’ allure to come to the store provide a sufficient competitive moat. After announcing a 7.8% increase in same store sales, the stock touched a new 52-week high this morning.
It may be a bit extended right here, but I’d be a buyer on a pull back towards the $175 level.
A Few Setting Up For Sales
Like most Wall Street predictions and reactions, the selling in retail stocks got way overdone, essentially pricing in bankruptcies.
But now that that’s over, some of the rebounds have returned to levels that represent both technical resistance and valuation levels. However, these may overestimate their recovery prospects. To better understand the future of retail, we need to take a hard look at some of these recoveries.
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Kroger is still the largest supermarket chain with over 2,700 stores to Whole Foods’ 400. This morning’s earnings report shows that it’s not going out of business anytime soon. But in a business of already razor thin margins, it will continue to have profit and competitive pressures. I think the stock will run into resistance near the $30 level.
Target (TGT) has been undergoing many initiatives to ramp up online sales and refresh its merchandise. But it still strikes me as operating in a no-man’s land; its groceries fail to bring in everyday shopping, it relies on discounts to drive traffic and its online/mobile sales are still negligible. I think the stock is a sale near the $65 level.
Kohl’s has also tried to freshen up its merchandise, making deals with brands such as Under Armour, but it remains a legacy big box store trying to anchor malls with declining traffic. I think the stock is a sale near the $50 level.
Macy’s enjoyed an incredible run from 2012 to 2015, as it seemed on the forefront of figuring out the “omni-channel” strategy. But the secular shift to online (read: Amazon) proved too great, and shares have tumbled some 75% from the 2015 highs.
This recent rebound may carry a bit further, but ultimately I think the stock sinks back below $20. I think shares are a sale near the $30 level.
And just to come back to where this all started, shares of Amazon have gained another 12% of some $130 billion in market cap since that June acquisition of Whole Foods, and there’s nothing to suggest it won’t keep gobbling up more consumer and investor dollars. For the time being, Amazon will continue to define the future of retail.
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