Seeking Alpha

Retail Not So Apocalyptic

by: Michael A. Gayed, CFA

Consumer spending has been the driving force behind the US economy, irrespective of slowdown fears, and trade war concerns.

The retail apocalypse has been growing, with the latest bankruptcy filing by Forever 21, despite high consumer confidence in the economy.

Contrary to the growing retail apocalypse, retail ETFs have emerged as outperformers over the past 6-month period.

Change almost never fails because it's too early. It almost always fails because it's too late. - Seth Godin

This adage is most apt for the US retail industry, which is undergoing a transformation. Irrespective of the brand power or size of the customer base, the survivors in this industry are only those who are investing in change and are not scared to experiment with innovative ideas. While the trade war woes and slowdown fears have been battling business investments, consumer sentiment stays strong when compared to the previous recession.

Consumer spending has been the driving force behind the US economy, fueling economic growth and giving it an edge over other developed economies. Irrespective of tariffs, personal spending growth has been positive, though the rate of growth has been declining.

As I mentioned in the Lead-Lag report, consumers are willing to spend, and this is a bullish development for the retail industry. Picking the right investment is very important as store closures have also been reaching record levels, despite healthy consumer spending. The latest in the retail apocalypse has been the bankruptcy filing by Forever 21.

Looking at the performance of retail ETFs, the VanEck Vectors Retail ETF (RTH) has been one of the best performing retail ETFs, delivering almost twice the return generated by the broader market ETF (SPY) over the past six months. The SPDR S&P Retail ETF (XRT) and Amplify Online Retail ETF (IBUY) continued to underperform the broader market during the same time frame.

This deviation in performance suggests that neither online retailers nor traditional brick-and-mortar retailers are winning bets, but the best bets are the large retailers who are investing heavily across both dimensions to streamline the retail experience of the end consumer.

The superior performance of VanEck Vectors Retail ETF (RTH) can be partly attributed to its inclusion of top-tier retailers such as Amazon (AMZN), Walmart (WMT), The Home Depot Inc. (HD), Lowe's (LOW), Target Corp. (TGT), and Costco (COST) in its portfolio. These five retailers account for more than 50% of the total value of the portfolio. RTH has minimal holdings in departmental stores such as Macy's (M), Kohl's (KSS), and Gap (GPS) which are struggling to post top-line and bottom-line growth.

On a YTD basis, Target Corp. has been one of the best performing retail stocks, yielding a return of 62%, while Amazon yielded the lowest return amongst these six retailers.

All is not well with the departmental stores as they have underperformed by a significant margin since the start of the year.

Ahead of the holiday season, you must do your due diligence properly to ensure that you make the right investment and can get the most from the strong consumer sentiment. Look for retailers with a strong presence in the online and brick-and-mortar segments that are investing in better integration of the two. As consumers get hungry for deals, the competitive ones will survive that offer high-value product mix at competitive rates. Change is the need of the hour in the retail industry, and those who are investing in this transformative change will be the outperformers.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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: This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.