The 2-Minute Thought: The Lesson from Retail Stocks: Patience

The stock of Kohl’s Corporation (KSS), the operator of Kohl’s department stores, fell from $79 in early 2015 to $36 by mid-2016.

For anyone who got interested in the stock as it was falling, it’s been a frustrating period.  Kohl’s has had its ups and downs, but the news has been generally dismal.  The stock mostly has bounced around the high $30s and low $40, and much was said about the demise not just of Kohl’s -- but all of retail. 

Then surprise, surprise: In the last two months, Kohl’s stock soared back to $64 from the low $40s.  Kohl’s had its best holiday performance since 2001.  Total and comparable sales increased 6.9% over last year, and the company raised fiscal 2017 earnings guidance to $4.10 - $4.20 from $3.72 - $3.92.

CEO Kevin Mansell said that macro tailwinds certainly helped.  We’ve lapped the presidential election, the weather has been good, and the consumer seems to have more money in her pocket.  All of that is good.  But Mansell also says that we’re finally seeing the results of all the actions the company has taken to drive traffic, to create great customer experiences, and to personalize connections.

One lesson here is that patience pays off.  Retail wasn’t dead – but it sure took a lot of patience and willpower to shut out the awful news flow on how doomed it was.  

Now that the consumer is ready to spend a little more, lo and behold, comparable sales at many retailers started turning positive over the holidays.  At the recent ICR Conference for consumer and retail stocks in Orlando, the general timbre was optimistic, as in “We feel more upbeat than we have in several years.” 

The other lesson is that retail is a viable businessif you’re ready to play by the new rules of engagement.  The new rules recognize that customers have smartphones, that Amazon is a frightful force, and that customers are more demanding than ever when it comes to good value and unique experiences. 

The retailers that recognized the new rules of engagement early are seeing results.  That includes Kohl’s.  And now, even the laggards recognize the world has changed.  Most struggling retailers are in the midst of a transformation strategy that involves:               

  • Improving omnichannel presence and making investments in technology and digital fluency
  • Personalization, often through data analytics and loyalty programs
  • Creating meaningful customer experiences and reinvigorating merchandising
  • Optimizing and diversifying real estate portfolios
  • Cutting costs, reducing inventory, and improving operational efficiencies

For the retailers who caught on early, it took a lot of patience and persistence.  Kohl’s made major technology investments before it started seeing results – and now, it continues testing everything from mobile point-of-sale to a partnership with Amazon.  CEO Mansell says the company cannot be afraid to try new things.  At the same time, he says that the bricks-and-mortar stores remain the company’s greatest asset – and its greatest opportunity. 

The 2-Minute Thought: The Bottom for Retail

Are we there yet?  How about now?  I’m talking about the bottom for retail stocks, which have suffered mightily.  The S&P Retail Index is down 19% since last December, but it’s actually much worse than that.  For example, teen retailer Abercrombie has been decimated, having lost three quarters of its value since its peak.  And Macy’s, which delivered a total return of 412% between fiscal 2009 and 2015 is down 70% from its 2015 peak.  The list of ugly stocks, from Sears to Advance Auto Parts, is long.

At this point it gets tempting to hazard a guess on the bottom.  But we wouldn’t.  For one thing, calling bottoms is close to impossible -- so we say, don’t do it, don’t even try.  For another, retail covers a lot of things with a broad brushstroke.  There are department stores or multiline retailers, there are specialty merchants -- everything from Coach to Hanesbrands.  There are big-box discounters, dollar stores, and off-price merchants.  The S&P retail index covers the full range, from apparel to automotive to supermarkets and drug stores.

Nevertheless . . . you have to wonder if we’re getting to that point where – well, where you have to start to wonder about the bottom.  I started wondering about this the other day when an acquaintance of mine who claims to know nothing about stocks also told me in the same breath that Kohl’s and Macy’s were the worst stocks to own because retail is dead.  Okay.  And the obsession with the Amazon-ization of life is at fever pitch.  Research firm Bespoke has been tracking a “Death by Amazon” index that holds 54 retailers whose core business is in bricks-and-mortar physical locations (and it hasn’t been doing well). 

The biggest sign that pretty much everyone has given up on retail is when new ETFs that bet against it start coming out.  And last month, ProShare Advisors filed plans to launch double and triple-levered ETFs that rise on days when retail stocks fall.  Okay. That could signal the beginning of the end

The Wall Street Journal noted that new ETF introductions often come out at exactly the wrong time.  There was the rare earths ETF that hit the market right at the peak in 2010.  There was the yieldco ETF that reached its peak within four days of launch in 2015 and then plummeted.  There was the Direxion ETF linked to China A-shares that launched in 2014 just days after the market peak.

This isn’t to say retail is ready for a big turnaround.  Not at all.  There are serious, large problems in the space.  We are vastly over-stored – no one will dispute that.  There are long-term demographic headwinds working against retail.  Tastes are changing.  We’d much rather spend money on smartphones than apparel – or on opera tickets or fantastic meals with friends.  And the Amazon-ization of the world is very, very real. 

But perhaps it’s time to start sifting through all those retail names that have been written off and left for dead.  After all, retail is indeed a mixed bag.