In Wall Street's eyes, retailers not named Amazon ( AMZN ) stunk in 2017, until they didn't, buoyed toward the end of the year by holiday hopes and anticipated corporate tax-cut benefits.
[ibd-display-video id=3063339 width=50 float=left autostart=true] Now that the eggnog and bubbly have worn off and we're beginning to see which stores really felt the Christmas spirit, what can we expect from a sector challenged by a massive cultural shift in the way people shop? Does 2018 spell more doom for your neighborhood mall, or a turning point for brick-and-mortar shops?
Holiday Sales: 'False Read On Good News'
The "retail Armageddon narrative can moderate in 2018 as better holiday season results demonstrate that a good balance of bricks & clicks can yield growth," wrote Baird analysts.
But if Macy's ( M ) and J.C. Penney 's ( JCP ) solid November-December results - but crummy stock reaction - tell us anything, it's that not everyone has faith that one good retail Christmas can translate into continued momentum through the brand new year.
"It's amazing - everybody is so short-sighted," NPD Group retail analyst Marshal Cohen told IBD, adding that the holidays have "nothing to do with the success of 2018. (It's) a statement into the consumer psyche at the time."
The key festive season can account for up to 30% of some retailers' revenue for the entire year, per National Retail Federation calculations. Retail Metrics says December same-store sales are up 10.3% as of Monday, better than consensus for 7.2% comps.
But thanks to aggressive discounting and year-round promotions, selling a lot of goods doesn't necessarily translate to a lot of profit for stores.
And that "false read on good news" could lead to a "lot of bad news and challenging news come February," said Cohen, as shoppers close up their wallets after chucking out the tree and taking down the lights.
"Nowadays, you could be so far in the hole that a good holiday is just going to basically break you even," he told IBD. "And does it mean good momentum going into the next? No. You're as good as your last sale was."
Closures To Accelerate But Chains Survive
Expect more consolidation and store closures. In fact, commercial real estate services giant Cushman & Wakefield estimates more than 11,000 closures this year, a jump from last year's 9,000 shuttered storefronts.
So far in 2018, Macy's has already named 11 more of the 100 stores it's in the process of closing. And Sears Holding ( SHLD ) on Thursday announced a deathblow to over 100 Kmart and Sears stores, as the storied department store chain, once the nation's largest retailer, continues to cling on for life.
But closing a few doors isn't a bad thing, per se, in this "over-stored" America filled with dead malls and an abundance of shops and half-hearted foot traffic. Savvy brick-and-mortar retailers are instead beefing up their digital side in order to take on Amazon, as well as each other.
"The market shouldn't ignore all traditional retailers and fawn all over Amazon and other digitally native companies," wrote Jefferies retail analyst Randal Konik in a Tuesday report. He said that brick-and-mortar stores' efforts to shutter stores and improve their e-commerce operations "should lead to profit margin stabilization and improving (free cash flow) over the next 12 months."
Even department stores, despite all the murmurs about the death of the mall, should be fine.
Konik sees potential headwinds for Macy's and J.C. Penney this year, "given the success click-to-brick players have had in apparel/accessories," but also highlighted the steps department stores have taken to adapt, such as Kohl's ( KSS ) partnership with Amazon.
"We keep waiting for the shoe to drop on a couple of retailers, the J.C. Penneys and the Sears," Cohen said. "But you know, again, if they can make it through '15 and '16, they can certainly make it through '17."
But there's a lot of debt coming due in the next two to three years, Retail Metrics head Ken Perkins told IBD in December. It's "hard to imagine a retailer being able to grow their business enough to grow a cash flow strong enough to pay off high debt levels."
Who's most likely to run into trouble this year? Mid-size specialty chains, predicts Cohen.
Survivors Include Wal-Mart, Off-Pricers
Wal-Mart (WMT) gets its fair share of kudos for focusing on its digital operations, starting with the acquisition of Jet.com in 2016 and continuing with the pickup of a handful of online players such as ModCloth, Bonobos, Moosejaw and ShoeBuy last year. That, combined with its forward-looking tests - in-fridge delivery, anyone? - and competitive measures have given it decent Street cred against Amazon.
Off-price retailers such as TJX (TJX) should do well, say experts, who mostly still have faith in the "treasure hunt" vibe that stores like Ross Stores (ROST) and Burlington Stores (BURL) emanate. In the clothing space, few things appear more Amazon-proof to research firm Cowen than a bargain bin filled with the promise of discounted brand names.
Cowen analyst Oliver Chen hails T.J. Maxx and Marshalls parent TJX as his "best idea" for the year, and believes off-pricers as a whole will continue to grab market share from department stores and other full-price peers. He holds an outperform rating and recently increased price target of 88 on TJX.
"In a challenging retail environment where most retailers are seeing traffic declines, off-price is driving traffic gains," wrote Jefferies' Konik, who has a hold rating on TJX and Ross Stores. "This has led to strong, consistent comparable sales performance and well-controlled inventories in the channel, as their wide and shallow inventories rapidly turn to give shoppers something new and fresh to discover with every visit."
But Konik offers a word of caution. He sees an "imminent" threat in Amazon, and says off-price retailers' lack of a proper online presence - irregular inventory and e-commerce listings don't exactly go hand in hand - "will eventually take a toll."
But A New Retail Disrupter Looms
Smart-speaker/AI technology could be the next big thing to upend regular old commerce.
Research firm Magid says voice-enabled commerce and artificial intelligence tools have "the potential to disrupt and disintermediate retail and manufacturing."
That may leave retailers out in the cold if manufacturers go directly to consumers. In fact, packaged goods companies "will either merge or forward integrate and acquire retail, as they realize a voice-controlled world is really, really bad for them," predicted L2's Scott Galloway in late December.
Cowen's Chen believes voice recognition, which should reach 25%-30% penetration, will be the next mobile phone. "Retailers will need to interject themselves into the smart and connected home and find ways to make their brands relevant to frequent audio interaction despite the challenges of lack of visual cues," he said in a Dec. 26 note to clients.
Chen also predicts that "previously unlikely consolidation will occur," and that Wal-Mart and Target (TGT) "will undergo a cycle of M&A in order to develop customer capabilities similar to AMZN."
Loup Ventures even believes Amazon will acquire Target , calling it the "ideal offline partner for Amazon" because of its "shared demographic and manageable but comprehensive store count."
Analysts tend to have mixed emotions about Target, pegging it either as a distant third wheel in the Amazon-Wal-Mart war, or a contender making some smart moves. NPD's Cohen falls into the latter camp, highlighting Target's recent acquisition of same-day delivery company Shipt, its holiday performance and private-label successes in apparel.
"I think Target is going to be a huge winner," he said.
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