The "Amazon Effect": How Is Retail Reacting?

The "Amazon Effect"

The retail industry has been shifting in recent years and store closures are at an all-time high. People are calling this the "retail apocalypse" with a mall vacancy rate of 9.1%. According to Coresight Research, there were a record 7,000 net store closures in 2017 and 5,524 closures in 2018.

You ask yourself why this is happening when our economy has been booming for almost a decade. Unemployment hit its lowest levels in almost 50 years and our markets have experienced the longest bull market in US history. The question isn't whether or not people are spending but where they are spending if it's not at the malls.

The answer is online shopping. Amazon AMZN has completely changed consumers shopping experience, giving customers access to almost anything their hearts desire at the click of the mouse. Consumers don't even have to get off their couches to get the latest apparel. This change in consumption patterns has been coined the "Amazon effect".

The "Amazon effect" has been systemic in the retail space and has caused brick-and-mortar retails to take huge valuation cuts. These retailers either have to admit defeat or pivot to accommodate this new pattern of online consumption.

Here are a couple of apparel retail stocks that have been able to adapt to the changing retail environment:

Nordstrom JWN :

JWN is currently trading at its lowest P/E valuation in over 5 years making this a potentially opportune time to get in. This stock took a beating in Q4, with the rest of the market, and never recovered. JWN is still down 33%, with market sentiment in the retail space continuing to be negative. An impending recession is what concerns investors about the retail industry, with their profits being directly correlated with discretionary consumer spending. The Fed's dovish behavior is not helping this sentiment either.

Nordstrom has seen consistent top-line growth for the past 10 years and has been able to penetrate the online market as well, with 30% of its revenue coming from online purchases. JWN's margins have taken a hit from their recent changes to keep their business model relevant. Management is giving guidance that margins will grow 20 to 40 basis points annually for the next 5 years, with revenue incrementally increasing 3%. Earnings estimates for JWN have been climbing pushing this stock into a Zacks Rank #2 (Buy). Below you can see the 2 year P/E chart JWN (blue) with its sub-industry, indicating this might be a bargain buy right now.

T.J. Maxx TJX

T.J. Maxx is one of the few retail success stories as of late. TJX has seen strong growth over the last 52 weeks, up 33%, outperforming the S&P 500 by 20%.

TJX's price growth can be attributed to its earnings consistency. They have boasted top and bottom line growth for the past 10 years straight. They haven't had to take margin cuts like their competitors, keeping operations lean. With strong positive free-cash-flow, this company seems to have more room to run. TJX is selling at 20.5x earnings which is comparable to its competitors but isn't quite as cheap as JWN. The growth expectations for TJX are much larger than JWN though, with EPS expected to grow 24% in 2019 and another 10% in 2020. TJX currently sits at Zacks Ranking #3 (Hold) but could easily jump to a buy if economic sentiment continues to brighten.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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