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Equity Perspectives

Increasingly disrupted by e-commerce and changing consumer habits, department stores may be flagging, but select players should endure and present opportunity. 

Equity markets are at all-time highs, unemployment is low, and consumer confidence is at a 17-year high, according to The Conference Board, but a growing number of retail chains once considered household names have gone bankrupt in the last several years. Thousands of stores have been closed, hollowing out certain malls and shopping centers around the country. (See Chart 1.) 

Is bricks-and-mortar retail passé? After covering retail stocks for the past 17 years, I don’t see an end to this pain. I estimate that 3-5% of stores need to close every year to offset the disruptive impact of online retail.

Although most of the media attributes the pick-up in closures to the proliferation of e-commerce, I have long felt there’s been significant pressure from a shift in consumer preferences toward experiences (cruises, hotels, and gaming) over goods (especially apparel), which can explain the disparate stock performance in Chart 2. However, following difficult earnings results for retail in the early part of 2017, I felt select segments of retail were overly discounted by Amazon fear and were more resilient to the threat of online retail than investors perceived.

This proved a timely call, as investors have bid up the stock prices of “Amazon survivors” since the summer lows. The group of retailers that are proving to be more resilient competitors to pure-play online segments of the market include names in service and project-related sectors like home and auto repair, low-price point (and shipping unfriendly) segments like dollar stores, and even direct competitors to Amazon in the mass merchandise space are showing renewed life and taking e-commerce share. The stocks have been rewarded.  

Despite the success of select chains in defending their home turf, I would caution that e-commerce still poses significant risk to most segments in retail, particularly department stores and apparel stores that are increasingly vulnerable to e-commerce, as well as off-price and fast fashion competition. That said, these depressed segments could also see a significant benefit from substantive tax cuts should such proposals come to pass, as it would allow them to make necessary investments and moderate ongoing pressure on their business models.

In the long run, however, department stores are likely to be whipsawed by the confluence of powerful competitive headwinds as the consumer continues to shift greater share of wallet to experiences. As for apparel retailers, millennials generally prefer saving money on clothing to invest in a trip or a new smartphone, and I don’t think that will change as they get older.


Chart 1. Up the Wrong Escalator: Retail Store Mortality is Climbing Faster 
Announced store openings and closings, excluding grocery stores and restaurants, 2013-2018 (ytd)

Source: ICSC Research Team and PNC Real Estate Research


Chart 2.  Retail on the Ropes: Consumers Continue to Favor Experiences over Goods
Sector stock performance, January 1, 2017-November 3, 2017

Source: Bloomberg


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