How to Invest in Retail in 2020

Retail store closings hit a record in 2019, and though it may not have reached the 12,000 or so that had been predicted, the shape of the industry has likely been permanently altered. And even after two dozen major bankruptcies, the retail apocalypse may not end for another two years.

That is enough of a signal to convince most investors that retail is a sector to avoid, but savvy investors know the carnage has not been even and that some retailers are not only surviving, but thriving in this landscape. Knowing where to look is key.

Image source: Getty Images.

Surveying retail's wreckage

The rise of e-commerce has shifted consumer discretionary buying habits so that even the Christmas sales season isn't as important as it used to be.

November and December used to be when most consumers shopped, and the holiday season is still important for retail spending. But data from Coresight Research show that the advent of "shopping holidays" -- especially Amazon.com's annual Prime Day extravaganza in July and related sales from other retailers trying to piggyback on Amazon's efforts -- has caused consumers to shift their spending away from the last two months of the year.

Where the November-December period used to account for almost a quarter of spending in 1998, it has since fallen to 21% in 2018, and likely will be even lower this year. After all, Amazon sold an estimated $6 billion worth of goods on Prime Day in 2019, a 50% increase over the year before.

But that doesn't mean investors should only look online for stocks to buy. It's in the world of brick-and-mortar that arguably some of the best investment gems are hidden.

Finding the common denominator

Although we can blame Amazon for the demise of many retailers, other physical retailers are growing. Using data from IHL Group, eMarketer listed the top 10 retailers that are opening stores.

Data source: eMarketer.

What eMarketer notes is a common theme running through most of these retailers is that not only are many discount retailers -- Aldi, Dollar General, Dollar Tree -- they also specialized in generic merchandise for the most part.

You can find name brand goods at the dollar stores and the deep discount grocers, but their primary sales are in private label and off-brand names. Indeed, even at major supermarkets such as Walmart and Kroger, private label merchandise is growing four times faster in the United States year over year than national brands, according to IRI data.

Making a connection with consumers

Name brands are retreating from the physical arena. Nike (NKE 0.38%) may be one of the most high-profile examples of a brand that is increasingly relying upon the direct-to-consumer (DTC) sales channel.

While you're still going to find Nike footwear and athletic apparel on store shelves at Foot Locker and Dick's Sporting Goods (DKS 2.78%), it has forecast its DTC business will hit $16 billion by the end of fiscal 2020, a 54% increase over the $10.4 billion in sales Nike Direct generated during fiscal 2018. 

In the second quarter NIKE Direct grew 17% on a currency-adjusted basis, led by the NIKE Digital division surging 38% year over year, a situation it credits to its revamped Nike App and the SNKR App, both operating in over 20 countries.

A tale of two retail markets

What investors may find is a divergence in who sells what where. As the department store fades in importance, brands will seek to shift their sales from the wholesale channel to one where they have greater control over their brand, its pricing, and customer data. Retailers that are thriving, primarily discounters, will focus their efforts on promoting private label goods.

It's smart to do so too, because even major retailers can bolster their bottom line by selling store-brand goods. Dick's Sporting Goods has reported several strong quarters of growth after introducing its CALIA line of women's apparel, as well as its new Alpine Design and an all-new DSG discount line.

That suggests investors looking for bargains in retail look first in the discount bin -- the discount retailer segment. The market has assigned a premium to segment leaders like Dollar General, Five Below, and TJX, the home of T.J. Maxx and Marshall's, but their valuations are not necessarily excessive.

For others, like Dollar Tree, which is in the midst of a turnaround, it remains value priced and shouldn't be crossed off anyone's list. There are deals still to be had in the retail space, but only if you know where to look.