Back to top

Image: Bigstock

Retailers Are Down, But Are They Out?

Read MoreHide Full Article

The 21st century has brought with it a revolutionary change in technology and the way we use it. These changes have altered the way we interact, consume media, and make purchases. Because we are learning to expect more convenience from our services, companies need to adapt accordingly, and so far it appears that traditional brick-and-mortar retailers have not been up to the task.

Amazon’s (AMZN - Free Report) meteoric rise is one of the main drivers for poor brick-and-mortar store performance. In its recent earnings report, the company crushed expectations and posted its fifth-straight profitable quarter. Furthermore, the company announced that it is investing in its own 40-strong air fleet to deliver goods to customers.

Where is all of this money coming from? It’s being taken from retailers that are posting losses and trimming guidance on decreased traffic and same-store sales. The situation appears bleak for these companies, but is it the beginning of the end?

Weakened Performance

On August 8, Gap Inc. (GPS - Free Report) reported their Q2 sales numbers, in which they posted disappointing July sales and a 4% decrease overall decrease in same-store sales. The company saw decreased year-over-year net sales as well. The following day, Target Co. (TGT - Free Report) shares fell as much as 4% on news that Cleveland Research noted decreased customer traffic in July as a catalyst for downward earnings estimate revisions.

Furthermore, shoe company Crocs (CROX - Free Report) and luxury brand Kate Spade fell on disappointing earnings reports and slashed forecasts last week, following the continued trend in retailer woes.

J.C. Penny is expected to report earnings before market open on August 12. Like most large retailers, the company has increased spending on initiatives to help drive traffic. However, stiff competition from other retailers and discount stores, coupled with a -13.33% Earnings ESP make it yet another company unlikely to beat earnings expectations.

It’s Not All Bad

Adjusting to an online shopping dominated market involves a steep learning curve, but some companies are already learning to adapt. In our article on why Amazon can’t kill brick-and-mortar stores, we discussed how these companies are boosting their online presence. Wal-Mart (WMT - Free Report) grew its online sales 8% year-over-year by Q4 2015, while Target grew its online sales by 34% last quarter, which beat Amazon’s 28% growth.

Furthermore, Wal-Mart stock is up nearly 20% year-to-date, and has upward earnings estimate revisions for this and next quarter, along with the current and following fiscal years. The company announced a merger with online retailer on August 8, a move meant to further increase the company’s e-commerce presence and respond to Amazon.

Lowes (LOW - Free Report) and Home Depot (HD - Free Report) are retailers that have performed well this year, and are up 6.4% and 2.9% respectively year-to-date. These companies are trading at all-time highs, a testament to their strong performance.

The global macroeconomic environment has played a role in weaker performance to start off 2016. In particular, foreign currency headwinds have affected companies with international exposure, and expectations of a stronger dollar have led to companies trimming their guidance as well. A stronger dollar affects foreign exchange rates and diminishes international profits (as foreign currency gets converted to less dollars), while also reducing tourism to the U.S., which in turn hurts domestic retailers.

In other words, weaker retail performance really wasn’t entirely the fault of the companies, and paints the situation as more dire than it actually may be.

As our team points out, an improving economy has opened up more employment opportunity, and has brought forth the rise of minimum wage for retailers like Wal-Mart, Gap, as well as Abercrombie & Fitch (ANF - Free Report) . These will hurt profits but can be looked at as a long-term investment in improved sales and employee loyalty.

Bottom Line

The rise in e-commerce has taken the world by storm, and for good reason. Competitive pricing, the convenience of home delivery, and decreasing wait times make for very compelling reasons to skimp out on driving to one’s local store.

Even so, brick-and-mortar companies are catching up, and are remodeling themselves in order to enter back into the spotlight. Although the situation appears dire at the moment, one would be prudent not to count these companies out just yet.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 DaysClick to get this free report >>