Is This the End of Big-Box Retail?

The economy in the United States continues its steady, albeit unspectacular, recovery from the worst recession in decades. This is finally evident in consumer-related economic data in recent months. The American consumer is at long last feeling better about their financial condition, and it appears the widely scrutinized holiday shopping season was a positive one overall. At the same time, a clear divergence is materializing between how and where consumers spend money.

Online shopping is alive and well, thanks to its convenience and, in many cases, lower prices. Meanwhile, big-box retailers including Best Buy (NYSE: BBY  ) had few good things to say about their holiday sales. That's why it's critical for investors to separate the winners from the losers when it comes to the new era of retail shopping.

Is big-box retail doomed?
Of the many problems facing big-box retail, the necessary promotions to lure in customers stands as the most daunting. Best Buy's management specifically cited aggressive promotional activity to lure shoppers as the No. 1 reason for its poor holiday revenue. In all, Best Buy's comparable-store sales, which only include sales at locations open at least one year, actually fell during the holidays versus the same period the year before.

Best Buy points to 23% growth in online sales as a reason for optimism, but clearly the market was not convinced. The company still derives the majority of sales from its existing brick-and-mortar stores, and the fact that sales fell completely overrides any positive impact from online sales. That's why shares of Best Buy plunged nearly 30% after it released its results.

Big-box retailers miss the target
Meanwhile, Target (NYSE: TGT  ) is a company that couldn't seem to get out of its own way during the latter half of 2013. First, Target whiffed on its third quarter because its aggressive expansion into Canada failed to gain traction, and its adjusted earnings fell 6%. Even its same-store sales disappointed, with just a 0.9% increase.

Things got even worse for Target in the fourth quarter when it revealed that as many as 70 million shoppers had their personal information stolen. Hackers obtained data including payment card numbers, names, mailing addresses, phone numbers, and email addresses. Target was already forecasting a drop in earnings for its fourth quarter, and the recent data breach will only complicate matters further.

Target expects to earn between $1.50 and $1.60 in adjusted earnings per share in the fourth quarter, which would actually be a decline from the fourth quarter last year, when it earned $1.65 per share. Now it has the added pressure of a major data breach to deal with.

Fortunately, not all big-box retailers are struggling as mightily as Best Buy and Target. Costco Wholesale (NASDAQ: COST  ) grew same-store sales by 3% in its fiscal first quarter ended Nov. 24. Strong momentum continued in December, when Costco reported another 3% increase in same-store sales. And, if you exclude the negative impact of gasoline price deflation, same-store sales rose 5% in December.

Costco succeeds when its competitors can't
Going into the new year, it seemed consumer-retail giants had the wind at their backs. A slew of improving consumer-oriented economic data definitely implied a strong holiday shopping season. Retail sales rose in December at a 0.7% rate, excluding automobiles. This is seen as the "core" rate of retail spending, and December's growth rate blew away expectations, which called for a 0.3% increase. As a result, it would be reasonable to expect a strong holiday season from the big-box retailers.

However, that's certainly not the impression investors should take from Best Buy's and Target's most recent reports, which cover the crucial holiday shopping season. In contrast, Costco seems to be growing right along with the financial state of the American consumer.

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