Clicks Vs. Bricks: The Bifurcation Of Retail Continues

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Includes: AMZN, BABA, COST, DG, DKS, DLTR, EBIZ, IBUY, M, ONLN, TGT, XBUY
by: Jane Edmondson
Summary

The bifurcation of retail remains in play this year between traditional bricks and online clicks retailers, with a more than 15% YTD performance spread between traditional and online retailers.

It's been a tough environment in general for retail as looming tariffs remain an overhang on the sector.

But another factor has come into play with the rise of online options - picky consumers no longer have a tolerance for bad retail.

The performance spread between traditional brick-and-mortar retail and online clicks retail is more than 15% this year, with the S&P Retail Select Index down 0.67% versus a 14.6% gain for the EQM Online Retail Index.

Looking for bright spots in retail, it is all about online sales

The retailers beating earnings and sales expectations such as Target (TGT) are doing so thanks to a ramp-up in online sales. Target grew its online sales an impressive 42% last quarter as shoppers opted for curbside pickup service for online orders. Similarly, Macy’s (M) managed to exceed earnings estimates by delivering a "double-digit" increase in its online sales. Mobile is Macy's fastest-growing sales channel, with more than $1 billion in sales through its apps alone in 2018. Costco (COST) and Dick’s Sporting Goods (DKS) also experienced strong first-quarter sales, thanks to robust increases in online sales.

Tariffs are a looming threat in retail, with the White House contemplating tariffs as high as 25% on $300 billion in Chinese goods such as clothing, sneakers, and accessories.

Looming tariffs was a topic on the call for discount retailers Dollar Tree (DLTR) and Dollar General (DG). Both companies beat estimates last quarter, but may be faced with reducing their reliance on China for merchandise in order to sustain growth.

Despite all the tariff talk, U.S. consumer confidence rose by more than expected to the highest level since November. Americans are feeling the best about economic conditions in 18 years, thanks to a robust labor market and wage increases. The Conference Board’s Index climbed to 134.1 in May.

The positive sentiment bodes well for consumer spending and is in line with the University of Michigan’s sentiment index, which also jumped to a 15-year high in May.

One thing is for sure about the retail landscape - online sales is where the growth resides. The U.S. Census Bureau reported a 3.6% gain in online sales to 10.2% of total retail sales in the first quarter of 2019 versus flat sales for retail in general.

How to Invest in this Trend

Investors looking to capitalize on this long-term secular trend have a few options. Obviously, investors can invest in online retail stocks such as Amazon (AMZN) and China’s behemoth Alibaba (BABA). But ETFs also offer a diversified way to gain exposure to online retail.

The first online retail ETF, the Amplify Online Retail ETF (IBUY), now has a 3-year track record and a 5-star rating from Morningstar. Its assets under management are $250 million.

Its top holdings are listed below. Note that Amazon is not even in its top 10 given the ETF’s equal-weighted approach.

There have been additional ETF entrants to the market as well, including the ProShares Online Retail ETF (ONLN) and GlobalX’s E-commerce ETF (EBIZ).

Online retail is a global phenomenon. For those investors wanting to leverage the rising opportunity in the growth of international ecommerce, Amplify also recently launched its International Online Retail ETF (XBUY).

Retail ecommerce sales are expected to grow to $4.9 trillion by 2021, and some of the fastest growth will come from emerging market economies outside the U.S.

In terms of annual ecommerce sales, China is the top market, followed by the United States and the United Kingdom.

Conclusion

There are few industry disruptions as stark as the bifurcation in retail, and it is a long-term trend that will grow and persist going forward in the U.S. and around the globe. Even in a more mature market, like the U.S., with online sales still representing a little more than 10% of total retail sales, there is plenty of room to grow. The clicks should continue to dominate the bricks, for many years to come.

Disclosure: I am/we are long IBUY, XBUY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: EQM Indexes is the creator of the EQM Online Retail Index and EQM International Ecommerce Index which are both licensed by Amplify ETFs as ETFs. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. EQM Indexes does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. EQM Indexes makes no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. EQM Indexes is not an investment advisor, and makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth on this website. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by EQM Indexes to buy, sell, or hold such security, nor is it considered to be investment advice.