What happened
Retail stocks were slipping today as two separate pieces of news weighed on the sector. First, the coronavirus outbreak continued to spread, with the World Health Organization declaring a global health emergency as the death toll surpassed 200. Meanwhile, several airlines suspended all of their flights to China, and the U.S. State Department warned against travel to China.
Retailers are sensitive to the Chinese economy, since almost all of them depend on China as a manufacturer for everything from apparel to furniture to electronics, and the outbreak has the potential to upset that supply chain and delay shipments. It could also further depress visits from Chinese tourists. Separately, Amazon (AMZN 3.43%) shares surged today after the company turned in a better-than-expected earnings report for the holiday quarter, showing that the company continues to take market share from brick-and-mortar operators and the bifurcation between offline and online retailers seems to be accelerating.
As a result, the S&P SPDR Retail ETF (XRT 1.40%) closed down 3% on Friday, while the S&P 500 was down 1.8%, showing the impact of the coronavirus news. Among retail stocks that fell today were Macy's (M 0.44%), Nordstrom (JWN 0.68%), and Gap (GPS 5.59%), whose shares ended the day down 5.2%, 4.7%, and 3.9%, respectively.
Image source: Getty Images.
So what
In addition to the supply chain-related concerns and the growing threat from Amazon, Macy's may also be lagging today because of the pressure on the tourist economy. The department-store chain counts on tourists for a significant part of its business. In its earnings calls earlier in the year, Macy's blamed its poor performance in part on soft international tourist traffic, a substantial percentage of which likely comes from China. For example, sales to international tourists fell 9% in the second quarter, and Macy's said it expected tourist traffic to continue declining in the fall season. Macy's caters specifically to international tourists with a pass offering a 10% discount; it sees them as high-margin, high-value customers.
Macy's had also earlier warned on tariffs from China, indicating that much of its merchandise is imported from that country, so it could struggle if there are delays or issues with manufacturing.
Like Macy's, Nordstrom also seems to be making a play for the international tourist with its new flagship store in New York that is expected to be its busiest store and could bring in $300 million to $400 million in annual sales. The company's high concentration of stores on the West Coast may increase its exposure to Chinese tourism, as well. Nordstrom shares could also be taking a hit today because of Amazon's growth; Nordstrom's digital growth has slowed suddenly, turning what was once a strength into a liability. Nordstrom's digital sales grew just 7% in the third quarter.
Of the three retailers, Gap is the least dependent on tourism. However, the casual apparel chain may also be in the worst shape of the bunch. Gap recently scrapped its plan to spin off Old Navy, a sign of disarray in the company. This came just a few months after CEO Art Peck was forced to step down; the company is now searching for a new permanent CEO. Gap imports 21% of its merchandise from China, so a slowdown in manufacturing would certainly have an effect on its sourcing.
Now what
All three of these companies will get a chance to redeem themselves soon, with retail earnings season just around the corner. Macy's also has an investor day scheduled for Feb. 5, during which it's expected to lay out its three-year strategy and growth plans around real estate, concepts like Backstage, Story, and Bluemercury, and other key initiatives. In its holiday update, the company said that comparable sales fell 0.6% in November and December, an improvement from the third quarter.
Nordstrom did not report holiday results. Meanwhile, Gap said in its holiday sales update that it expected full-year comparable sales to come in at the high end of its previous guidance range (down mid-single digits) and that full-year adjusted earnings per share would be better than its previous outlook of $1.70-$1.75.
Retail investors should keep an eye on the coronavirus news, as an exacerbated outbreak could impact these companies. However, these stocks are already cheap, and a continued sell-off could set up a buying opportunity once market sentiment turns.
