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Here's a surprise headline that you probably thought you'd never read again: retail stocks are in rally mode. And they have been for several months now. Since early November, the SPDR S&P Retail (ETF) (NYSEARCA: XRT ) is up 18%, versus a mere 5% gain for the S&P 500 . Within that exchange-traded funds, many of the big names in retail have staged 50%-plus rallies.
What is happening under the hood?
Retailers are adapting and fighting back against Amazon.com, Inc. (NASDAQ: AMZN ) and other digital commerce threats. They are building out an omnichannel presence and winning back customers. Meanwhile, malls across the U.S. are getting facelifts and also changing to be more relevant, the combination of which is driving improved traffic trends.
Altogether, retailers are finally winning in the struggle against Amazon. And that means that this rebound in retail stocks is more than just a head fake. It is a secular growth narrative supported by improving fundamentals.
Here's a deeper look:
How the Retail Stock Rally Began
The retail stock rally started right before the holiday 2017 shopping period. Rumors started to circulate in early November that the holiday season was going to be one for the record books, and retail stocks started trading higher on those rumors. Those rumors were confirmed over the next several months with a flurry of positive earnings reports from retailers. Retail stocks shot even higher.
But most observers thought the rally was simply the byproduct of a strong holiday shopping period, and nothing else. In other words, a lot of investors were of the opinion that nothing had structurally changed about the "Amazon is killing all retailers" narrative.
Those pundits have since largely been silenced.
We are now six months removed from the holiday 2017 shopping frenzy and retailers everywhere are still reporting robust and only improving numbers. Across the board, the narrative seems to have flipped from negative comparable sales growth, margin compression and earnings degradation, to positive comparable sales growth, margin expansion and earnings growth.
The Retail Stocks Leading This Rally
Pretty much every retail stock you can think of has participated in this broad and significant rally. The big three department stores have all roared higher since early November:
Macy's Inc (NYSE: M ), Kohl's Corporation (NYSE: KSS ) and Nordstrom, Inc. (NYSE: JWN ) are all up more than 20% since early November, with Kohl's stock up 60% and Macy's stock up 85%. Comparable sales growth at all three major department stores in positive and trending up. Meanwhile, at Macy's and Kohl's, margins are on a healthy upward trajectory.
Sports retailers have been among the biggest winners. Since early November, Foot Locker, Inc. (NYSE: FL ), Dicks Sporting Goods Inc (NYSE: DKS ) and Lululemon Athletica inc. (NASDAQ: LULU ) are all up more than 50%, with Foot Locker stock gaining more than 80%. At Foot Locker and Dicks, comparable sales trends are improving, margin erosion is moderating, and profits are stabilizing. At Lululemon, growth is red-hot and margins are roaring higher.
Smaller retailers have also been among the biggest winners. Between Urban Outfitters, Inc. (NASDAQ: URBN ), Express, Inc. (NYSE: EXPR ), Michael Kors Holdings Ltd (NYSE: KORS ), Abercrombie & Fitch Co. (NYSE: ANF ), American Eagle Outfitters (NYSE: AEO ), Zumiez Inc. (NYSE: ZUMZ ) and Ralph Lauren Corp (NYSE: RL ), the average stock price gain since early November is north of 50%. All of them are up more than 20%, and the biggest winner has been ANF, with a 100% gain since November.
The story across the board at all those smaller retailers is consistent with the narratives at the bigger retailers. Comparable sales trends are improving. Margins are improving. Traffic is up. E-commerce sales are roaring higher. And earnings growth is positive.
Why the Retail Stock Rally Matters
The rally in retail stocks is important because it proves that retail isn't dead after all.
Instead, what happened over the past several years was a right-sizing of the traditional retail market. Amazon and other digital commerce players quickly rose in popularity and stole market share from traditional retailers. Those traditional retailers were forced to downsize their operations to accommodate this lower customer flow.
But now, this down-sizing period appears to be over, and traditional retail is once again co-existing with internet retail.
Consequently, the long-term outlook for retail stocks is actually quite positive. These guys aren't dinosaurs. They were dinosaurs, and then they remodeled stores, enhanced their e-retail operations, and built out omnichannel capabilities like buy-online, pick-up in-store.
Now, traditional retailers are largely adapted to succeed in today's omnichannel, dynamic retail environment. As a result, retail stocks should keep rising.
Bottom Line on Retail Stocks
A lot of retail stocks were priced for death, but death isn't coming. As such, the rebound in retail stocks will be large. We've already seen this in a lot of names (50%-plus rallies have been quite common in the retail space recently), but hardly any retail stock trades near peak levels.
As such, the rally will persist. It may be bumpy, but the overall trajectory for retail stocks going forward should be up.
As of this writing, Luke Lango was long AMZN, M, FL, DKS, EXPR and ANF.
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