When considering exposure to consumer sectors and retail-related exchange traded funds, investors should keep in mind the soaring growth of e-commerce and the decline of traditional retail stores.
On the recent webcast (available on demand for CE Credit), Did Retailers Get What They Wanted for the Holidays? The 2018 Outlook for Bricks-and-Mortar Retail, Brian Tunick, Managing Director of RBC Capital Markets, painted a rosier picture for U.S. retailers. After a five-year period of same-store sales decelerating, retailers finally saw comp sales rise 1% in the fourth quarter of 2017, capitalizing on their best holiday period in four years with sales expanding 6% year-over-year.
However, a number of secular pressures remain. For instance, mall traffic continues to decline, consumers have shifted over to online shopping and deflationary pressures on average unit retail or net sales after markdowns.
The secular pressures also reveal the negatives of an over-saturated retail industry in the U.S. Tunick argued that the U.S. is “over-retailed” as the country boasts the largest retail square foot per capita in the world with $14,614 retail sales per capita. The U.S. may also suffer from too much footage allocated towards apparel, namely large department stores.
Consequently, the shifts in spending habits and large square footage allocated to brick-and-mortar shops have weighed on the traditional retail segment. Simeon Hyman, Head of Investment Strategy for ProShares, revealed that retail companies have systematically underperformed the broader equity market. Over the past year, brick-and-mortar retail taken from the GICS Retail Industry groups have declined 3.44% over the past year and only returned an average 0.52% annually over the past five years. In contrast, the Russell 3000 returned 24.0% over the past year and averaged 15.11% in the past five years.
“Traditional physical retailer stocks have systematically underperformed the equity market for the past one-, three- and 5 year periods,” Hyman said. “In fact, you have to go back five years to even find positive returns – barely.”
While retailers just experienced one of their best holiday sales periods in years, strong overall sales growth of over 5% was still dwarfed by a 20% jump in online sales, reflecting the ongoing shift in consumer habits to e-commerce. Looking ahead, retail disruption and performance challenges for traditional bricks-and-mortar retailers are likely to continue.