This Reuters report said investors were entering the holiday shopping season with a familiar problem: stronger consumer demand could still leave retailers with thinner profits.
The pressure came from a fierce contest for e-commerce sales, with Amazon.com Inc and Target Corp both offering free shipping on small purchases. At the same time, a run of disappointing earnings from Target, Kohl’s Corp and Lowe’s Cos Inc reminded markets that tariffs on imported goods, shifting consumer preferences and competition were all weighing on margins.
Target shares fell 10 percent on Tuesday after the company said profit margins had been hit by higher spending on its online business, wage increases, price cuts and the cost of preparing and shipping orders. The company’s results became a warning sign for the broader retail sector heading into the Thanksgiving and Black Friday period.
“The retailers and e-commerce players are duking it out,” Shawn Kravetz, chief investment officer at Esplanade Capital LLC, said at the Reuters Global Investment 2019 Outlook Summit in New York last week.
“Amazon is buying that (consumer retail) business. Other players are buying that business. So it’s a war.”
Kravetz, whose first job after earning an MBA in 1995 was at CML Group Inc, said the economics of retail have changed sharply. He recalled the old model of giving away goods to win shipping revenue, but said today many sellers are operating with very little gross margin while still absorbing delivery costs.
He argued that the model can still work for Amazon if the company keeps expanding scale. In his view, the company can absorb low margins now and benefit later if revenue keeps growing and prices rise even slightly.
Consumer demand, however, was still expected to be strong. A Reuters/Ipsos poll showed about 38 percent of American consumers planned to shop on Black Friday after Thursday’s U.S. Thanksgiving Day holiday.
Money managers were becoming more selective. Kathleen Gaffney, a portfolio manager at Eaton Vance Corp whose Multisector Income Fund holds bonds issued by J.C. Penney Co Inc and Nordstrom Inc, said she had reduced her J.C. Penney position.
“They’ve pretty much secured every asset that they have so it is going to be challenging. Nordstrom, on the other hand, is well suited for the current market,” Gaffney said at the Reuters summit, adding that Nordstrom’s management had been effective and that the chain served a solid upscale niche.
Nordstrom shares had gained 10 percent that year, including dividends, though that was well below earlier gains of about 50 percent before disappointing third-quarter same-store sales. J.C. Penney shares had fallen nearly 60 percent over the same period as the company struggled to attract younger shoppers who were less likely to visit traditional department stores.
Katie Shaw, sector leader for the global consumer team at Fidelity Investments, said she remained constructive on retail stocks because U.S. workers were seeing inflation-adjusted wage gains across income levels for the first time since the 2007-2009 global financial crisis. Even so, she said her portfolio held less exposure to mall-based department stores and big-box retailers than her benchmark.
“The role of retail to a customer’s life has changed,” Shaw said. “There are a number of companies who have yet to invest in driving emotional connection with consumers.”
The article also included a Reuters file photo from November 24, 2016, showing a customer loading a shopping cart during Black Friday sales at Target in Chicago, Illinois.
Reporting by Trevor Hunnicutt; editing by Jennifer Ablan and James Dalgleish.
For context, the report linked the holiday retail battle to the longer shift in consumer behavior after the 2007-2009 global financial crisis, with investors weighing whether scale, shipping subsidies and online investment could still produce acceptable returns.
By the time of the Reuters Global Investment 2019 Outlook Summit, the debate had become not just about sales growth, but about which retailers could survive a market where shipping costs and price cuts were increasingly part of the fight for customers.
