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Catchphrases like the "Death of Retail!" or the "Retail Apocalypse!" have been flying all over the media for around a decade now. Whales like Amazon.com Inc. (NYSE: AMZN) and Walmart Inc. (NYSE: WMT) have been crushing the competition since way, way before the coronavirus upended life and commerce around the world.
Just take a look at this exchange-traded fund. I've been talking about it in my Markets Live stream because it's returned almost 5% this year. I'm talking about the ProShares Decline of the Retail Store ETF. And get this: It's trading under the ticker EMTY.
The name and ticker say it all, but still... Ouch. Someone on Wall Street has an edgy sense of humor...
In 2019, more than 9,300 store closings were announced, and the COVID-19 pandemic promises to eclipse that grim record. I'm reading now that Cushman & Wakefield estimate a whopping 12,000 big chain stores could fold in 2020.
Look - it would be unfair to lay all of this at the feet of Amazon and Walmart; for retailers, business conditions can be fluid at the best of times, and the COVID-19 pandemic has been absolutely brutal for most of the consumer spending-driven U.S. economy.
So the big players have clearly cemented their positions. But here's the thing: They're not the only game in town. Nor is all retail dead - not by a longshot.
It's just that, to use an "SAT word," retail has almost completely bifurcated; there are now two separate retail sectors emerging.
These Retailers Will Survive and Thrive
So, I alluded to this in my recent Fast Profits trade recommendation, but they're fast profits after all, so we didn't have time to dive into the details.
Before COVID-19 hit, retailers - all too aware of the danger posed by the Amazons and Walmarts of the world - started to make a different kind of... let's say... value proposition for shoppers.
They were going to offer experience: white-glove service, live entertainment for kids and grownups, top-shelf food and drink. The shop was to be a "destination."
Shoppers, it was reasoned, would spend more time inside, enjoying themselves, and picking up goods that maybe they might not have otherwise had on their shopping lists.
COVID-19 changed all that when stores not deemed "essential" shut down; consumers - those who hadn't lost their incomes - wanted to spend as little time as possible out of their own houses, let alone slurp complimentary bubbly while shopping for the season's hottest styles.
And everyone's got that "Target story," right? Where you head into Target intending to spend $15 on a new frying pan but you end up with a shopping cart full of $200 worth of stuff you grabbed that "you didn't realize you needed"?
For the moment, that's over with, too - though Target will do okay.
The winners in this new cutthroat competition are the stores that have been able do at least one of two things:
- Pivot to offering online shopping and/or curbside pickup at popular prices.
- Offer a demonstrably safer shopping experience.
Over the long weekend, I took a (socially distant) stroll down the big Cincinnati shopping street near me, and I saw hordes of shoppers, mostly young folks (that's a different "COVID market" story), lined up outside of the American Eagle Outfitters Inc. (NYSE: AEO) shop there.
Get this: They were lined up because American Eagle was running way below capacity. They were limiting the number of shoppers who could be in the store at any one time, mindful of the need for social distancing.
Everyone I saw in the store was masked, of course, but take a closer look, and you find out that they're disinfecting surfaces, steam-cleaning tried-on clothes, and sterilizing things like sunglasses and jewelry that people might try on.
And they're doing this in broad daylight, in front of all the customers. All done, not just because it's what has to be done, but to make customers feel safer shopping there.
That's the right idea. Here's my idea: I think AEO shares are going to quickly hit $11 because of it.
Discounters are another pillar of this new retail sector. It's easy to see why: There are 40 million Americans out of work right now. Those that do have incomes are tightening their belts in a huge way because of unprecedented uncertainty.
A store like Ollie's Bargain Outlet Holdings Inc. (NASDAQ: OLLI) is in pole position in the new retail. That was another store I saw offering safer curbside pickup. It's taking some other reassuring, common-sense steps now, too: capacity limits, frequent sanitizing, social distancing, and quantity limits on "hoard-able" items.
What's more, as a big discounter, Ollie's is reaping the benefits as other stores try and unload incredible amounts of unsold inventory from the lockdowns. Ollie's is able to get that inventory for a couple of cents on the dollar, mark it up, and watch it fly out the door.
Multinational TJX Cos. Inc. (NYSE: TJX), which operates TJ Maxx, Marshall's, HomeGoods, HomeSense, and Sierra in the United States, TK Maxx in Europe, and Winners in Canada - all hard-hit places - is another discounter I think it going to do very well in the new retail reality, for the same reasons Ollie's is.
The bottom line is that retail isn't dead, but it has changed - possibly for good. Investors need to follow the shoppers to profits now.
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About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.