Traders: Beware the 'E-commerce Good, Retail Bad' Argument

Picture any recent November: Brick and mortar retailers would be eagerly anticipating the start of the holiday spending season. Stores would be preparing for the imminent Black Friday stampede and hoping – after yet another year of e-commerce chomping at their margins – that a mad rush of end-of-year buying would restore their balance sheets to black.

Of course, the reality this year is going to be very different. While physical retailers remain open in the majority of U.S. states, coronavirus has heaped more pressure on a sector that was already fighting a rearguard action against the relentless onwards march of e-commerce. Social distancing will make the unruly Black Friday crowds of previous years seem a distant memory and for many shoppers, that’s a good thing. It’s all just further evidence, some argue, of the slow demise of physical retail.

But does the current prevailing wisdom – namely, that the struggles of physical retailers will benefit e-commerce – hold true? And, crucially, how should investors be judging retail stocks in terms of their wider portfolio?

We've taken a deep dive and observed a few trends that suggest the ‘e-commerce is the future / physical retail is the past’ dichotomy oversimplifies a diverse and complicated landscape of winners and losers during the new normal.

1. Some big brick and mortar names are in bad health, but others, less so

Combined, Target (TGT) and L Brands (LB) operate roughly 5,000 premises and employ 450,000+ Americans. As retailers with vast brick and mortar footprints, 2020 could have been a horror show but both companies are thriving, their Q3 earnings have absolutely crushed investor forecasts. Target’s stock is up nearly 37% YTD and L Brands has risen around 129% in the same period. Both are given ‘strong technical buy’ ratings on TradingView.

Conversely, despite beating their Q3 earning forecasts, Home Depot’s (HD) is down more than 3% following the report. Likewise, Lowe’s (LOW) stock is down more than 15% in the last 30 days (since October 20th). Both receive ‘technical sell’ ratings on TradingView.

The differing fortunes of these four reflects these unusual times. After an initial share plunge at the start of the coronavirus crisis, both Home Depot and Lowe’s bounced back, buoyed by the growth in home repairs under lockdown. But as investors look forward into 2021, both companies see tepid growth versus some of their other discretionary peers.

On the other hand, L Brands, which owns Victoria’s Secret and Bath & Body Works, among others, has seen major growth in sales due to greater demand for nesting attire and soap and hand sanitizer sales. Target’s status as a critical retailer with its wide product inventory has made it a go-to shopping destination for otherwise adverse U.S. shoppers.

And, of course, there’s another big factor at play:

2. Physical retailers that don’t up their online game do so at their peril

Target’s brick and mortar business continues to do well, sure. But it’s also operating a brilliant online presence, and meeting changing customer needs with its delivery and pick up options. Coronavirus or no coronavirus, e-commerce isn’t going away and retailers that fail to upgrade their online offering are still doomed to fail long-term.

Grocery businesses with underdeveloped online offerings, like Kroger (KR), and Sprouts Farmers Markets (SFM), both currently listed as ‘technical sells’ on TradingView, should take heed of these shifting sands in consumer trends and act now to ensure they don’t get left behind.

3. The vaccine won’t be here soon, so tread carefully with dumpster diving retail and expecting quick wins

Pfizer (PFE), Moderna (MRNA) and AztraZeneca (AZN) have all released 90%+ success vaccine trials, and Albert Bourla, Chairman and CEO of Pfizer, is hopeful that their vaccine – once approved – could be in circulation by the end of this year. This is all good news, but most conservative estimates suggest that widespread deployment of any vaccine won’t take place until at least Q2 2021, which means it will be quite some time before we can consider a return of retail.

If you’re in the market for bargain basement retail stocks pummeled by the pandemic, tread carefully and think long term: there are going to be many more bumps in the road before a full recovery is upon us.

4. A low-key holiday season is going to break some companies

Q4 is the time when retailers expect their best sales of the year – the so-called Golden Quarter. But this isn’t going to be a typical end-of-year period.

Retailers like Costco (COST) and Walmart (WMT) are currently listed as ‘strong technical buys’ on TradingView but it will be interesting to see how their sales figures hold up over the next couple of months in this unusual trading environment. We’ll have to wait for Q1 for those numbers.

The lessons traders should take from all this?

Brick and mortar is far from dead but, as ever, you need to choose investments carefully. Be on the lookout for retailers with low debt, stable fundamentals, and an increasingly even blend of physical and online sales as well. And while many well-known brands are currently available at rock bottom prices, don’t let the good news about the vaccine fool you into thinking there’s quick profits to be made. We’ve still got a tricky path ahead.