Rising Economic Tide Lifting Many Retail Boats

On Wednesday, November 29, 2017, the Commerce Department reported Wednesday that U.S. economic output grew at a 3.3% annual rate in the third quarter, faster than earlier estimated, and the highest rate in over three years. Meanwhile, consumer and business confidence are at recent-year highs and equity markets continue to surge to new all-time highs.

This strong growth belies contentions that the economy had reached full employment and peak capacity in December 2015 when the Federal Reserve began to increase interest rates after leaving them near zero for close to eight years. The widely unexpected nature of this strong growth badly wrong-footed the retail sector of the equity markets going into the all-important holiday shopping season. After all, 2017 has been the year when e-commerce fully hit its stride and Amazon inarguably became the most significant player in this space. Most observers of retail were familiar with the Death by Amazon index, a list of retail stocks compiled by Bespoke Investment Group that the firm believes will be most hurt by the technology behemoth.

Based on equity prices going into the holiday shopping season, 2017 was expected to be dismal for most brick and mortar retailers. Everyone appreciates that e-commerce will never fully displace physical stores and many traditional retailers have dutifully carved out competitive internet platforms. But Amazon had led the equity markets higher most of the year, up over 50% over the year and projected to continue to squeeze out its more traditional retail rivals. Casual observers would not have been surprised if the 2017 holiday season proved to have been game, set and brand-ending match for several familiar names.

However, this was not to be. Unexpectedly strong economic growth has resulted in the most buoyant consumer spending since before the 2008 crash. And this has resulted in the holiday season being less of a zero-sum game among retailers. There is a rising tide of consumer spending and it is being shared across the retail space.

At this point, most estimates are that store traffic is at least equal to last year, while e-commerce spending across all retailers is significantly higher. As a result, the past couple of weeks have seen a significant repositioning of equity prices among retailers. Amazon finished the second half of November roughly where it started. Meanwhile, most of the remainder retail sector, including department stores, have moved higher.

Stocks posting gains in the week after Thanksgiving included the following: Dillard’s (DDS +9.9%), Sears Holdings (SHLD +6%), J.C. Penney (JCP +3%), Macy’s (M +7.4%), Kohl’s (KSS +3.5%), TJX Companies (TJX +3.1%), Nordstrom (JWN +7.1%), Ross Stores (ROST +3.7%), Target (TGT +8%) Party City (PRTY +3.3%), Finish Line (FINL +4.6%), and Dick’s Sporting Goods (DKS +5.1%).

Kroger, the nation’s largest grocery store chain, also made business headlines when it reported better than expected earnings, including its strongest Black Friday ever, and saw its equity jump over 10%.

In addition to an improving economy, retailers have had other good fortune as well. From a short-term perspective, the doom and gloom surrounding the sector resulted in significant short interest in their shares. An optimistic start to the holiday shopping season led to short covering and momentum trades on the rising prices, accounting for some of the rapid price increases across the sector. From a longer-term perspective, the tax bill poised to be passed by Congress should stimulate the economy further, especially for domestic corporations.

As always, the process of creative destruction will continue to play out in retail and the glory days of the American shopping mall will never return. However, all indications are that the 2017 Holiday Season will be one of generally good cheer across the retail landscape.

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