The Death Of Traditional Retail Is Accelerating

From Brad Hoppmann: Have you been to a shopping mall lately? It’s not what it used to be, that’s for sure.

A lack of foot traffic, the absence of once-popular specialty stores, and poor customer service are just a few of the recent observations I made during my last visit to a once-mighty local mall.

This observation isn’t just mine, however. It’s been reflected in malls throughout the country, and via the many store closures and bankruptcies in the retail industry.

Then there is the price of retail stocks.

Not all retailers are created equal, of course. But I will note here that the benchmark Exchange-Traded Fund, the SPDR S&P Retail ETF (XRT), has recently come under a lot of selling pressure.

XRT is down nearly 5% year-to-date. Now, that doesn’t seem too horrible. Not until you realize that stocks in the S&P 500 are up nearly 5% in that same time frame.

So, what’s the deal? Are we about to hear the disturbing death rattle of retail?

A recent cover story in Investor’s Business Daily, “Death Stalks Retail Stocks, But Hope Lives On,” took up the complex subject of retail’s future.

I thought the piece was interesting, as it laid out many of the prevailing issues facing the retail industry. It also offered insight into how the sector could evolve in the years to come as it tries to survive.

Most importantly, in an age where Amazon.com (AMZN) rules the retail roost, the article asked whether traditional retail stocks were “just flat-out doomed.”

Look at this price chart of the online seller of everything, AMZN, vs. the world’s biggest brick-and-mortar retailer Wal-Mart (WMT). You’ll see what investors have emphatically stated over the past decade.

WMT has gained a little over 55% in the past 10 years. But look at AMZN … which is up more than 2,000% in that same time frame.

Here’s the money quote from IBD:

No analyst interviewed for this story was ready to declare the physical store dead. But retail’s wounds still run deep, and there are almost certainly too many stores in the U.S. Many stocks of top chains, while not as low as during the Great Recession, are rolling over into pronounced downtrends. The weak stock action creates short-selling opportunities for investors who believe the worst for retail is yet to come.

When you have a mainstream publication talking about the short-selling opportunities in a sector, well, that sector is in serious trouble.

Still, the retail segment is big. Some estimates put the industry at about $4 trillion. That, according to some, means companies that sell things in physical stores are still viable.

Per IBD:

“There’s no way Amazon becomes a $4 trillion e-tailer in 10 years,” said Jeff Roster, vice president of retail strategy at IHL Group. “That’s just not going to happen.”

The solution to the “retail ice age,” as I’ve heard it called, could be finding new ways to use existing retail space.

Analysts say vacant stores could be used as warehouses and pickup spots for online orders. Or, in existing stores, a smaller floor space might be used to display merchandise, while a larger back area would serve the e-commerce end.According to analysts cited in the IBD article, retailers need to reduce their real-estate footprint, and also take a “hybrid approach” to stores that maximizes floor space while also accommodating online orders.

Macy’s (M) and Target (TGT) are already considering such a store layout. Target has said 55% of online orders are completed at its stores, potentially strengthening the case for the strategy.

While these so-called hybrid stores are an interesting concept, Amazon can play that game too. Indeed, the online retailer has already opened “pop up” stores in various locations. It also has its sights set on opening grocery stores.

Yet for traditional retailers facing an existential crisis, the key to survival may be a combination of building out their online infrastructure while also making their stores “cool” again.

That’s a tall order. But it’s one that many retailers must fill if they want to survive.

The SPDR S&P Retail ETF (NYSE:XRT) was trading at $41.88 per share on Thursday morning, down $0.16 (-0.38%). Year-to-date, XRT has declined -4.97%, versus a 4.84% rise in the benchmark S&P 500 index during the same period.

XRT currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #33 of 45 ETFs in the Consumer-Focused ETFs category.


This article is brought to you courtesy of Uncommon Wisdom Daily.

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