Retail stocks, those not named Amazon (AMZN) (up 56% in 2017) or Walmart (WMT) (up 43% in 2017), entered 2017 with tons of question marks. Namely, which ones would die and which would survive?
Overall, retailers left investors little to be excited about. If you just bought and held the SPDR S&P Retail ETF (XRT) in 2017, betting on a strong recovery, you gained just 2.52%, trailing the 25% rise in the Dow Jones Industrial Average and a better-than 19% return in the S&P 500 Index. Take a look at the chart further down, courtesy of YCharts.
Questions and uncertainty will no doubt roll over into 2018, though some of the survivors revealed themselves in 2017. But “surviving” is far from an investment thesis. Not only do retailers, specifically the brick-and-mortar variety, faced intense competition from each other, combine this with their already-low profit margins, fickle consumer tastes were enough to keep retail investors awake at night.
And to say nothing about the many execution risks they face by their shift to online or omni-channel model as a means to “Amazon-proof” themselves.
In that vein, unless your name was Best Buy (BBY) (up 60% in 2017) or Costco (COST) (up 21% in 2017), you had a hard time convincing capricious shoppers to stay loyal to and enter your establishment. Thus, say goodbye to your 2017 same-store-sales targets and say hello to a plunging stock price — something retail laggards such as Macy’s (M) (down 30% in 2017), Foot Locker (FL) (down 34% in 2017), J.C. Penny (JCP) (down 62% in 2017) realized.
There were also some divergence in 2017, however, which may appear in 2018. The fact that Kohl’s (KSS) rose 10%, despite the stumbles of Macy’s and J.C. Penny, was a surprise. As was the 10% decline in Target (TGT), which swayed far from Walmart’s 43% rise. Here, too, it’s tough to ignore the impact of Amazon’s purchase of Whole Foods had on Target’s prospects.
In many respects, the so-called “retail apocalypse” many analysts predicted for 2017 came to pass. Not only did bankruptcies and store closings rise in 2017, including the likes of electronic specialist hhgregg and Sports Authority, but the demise of long-time iconic brands Radio Shack and Toys R Us, combined with the rapid decay of Sears (SHLD), made the death of retail more commonplace.
You will have to go back to 2008 to find the last time retailers closed more stores than they did in 2017. For retail investors who held out long enough, luck would strike as it did for the likes of Staples, which was acquired, taken private by Sycamore Partners in a deal which valued the office supplier at around $6.9 billion. Staples investors not only received $10.25 per share, they didn’t have Amazon to fear anymore.
But not everyone was as lucky. If you owned Rite Aid (RAD) at the start of 2017 when it traded north of $8 (now around $2) and with an M&A deal on the table from Walgreens (WBA), you were left in disgust.
All told, finding retail stocks that can deliver market-beating performances in the next 12 to 18 months will be difficult, given the disruptive shift that continues. At the top of my list, however, will be Home Depot (HD) and Lowe’s (LOW), which not only gained 41% and 31%, respectively, they’ve resembled what true “Amazon-proof” businesses look like. Likewise, I expect the auto retailers, namely, Advanced Auto Parts (AAP) (down 41%) and Autozone (AZO) (down 10%) to be towed out of the ditch they ended 2017 in.