The coronavirus outbreak has been particularly lethal for the retail sector. The industry has been dealing with a variety of problems -- from store shutdowns to declines in tourism to a drop in demand for products considered non-essential. The SPDR S&P Retail ETF has fallen 25% this month, compared with a 14% decline for the S&P 500 Index.
Now the question is: Is it too early to buy retail shares, or is this the moment to dive in and add to retail holdings?
Target withdraws guidance
Before answering that question, we should take a look at the status of the current pandemic and its impact on the economy. Cases of COVID-19, the illness caused by the new coronavirus, have reached more than 600,000 worldwide. The U.S. now has the largest number of confirmed cases in the world, surpassing China and Italy. On a seasonally-adjusted basis, U.S. jobless claims surged to more than 3 million for the week ending March 21 -- a new record -- due to disruption from the outbreak, according to the U.S. Department of Labor.
Even Target (TGT -0.26%), which has surpassed earnings estimates for the past four quarters and sells a good mix of essential items along with discretionary products, is suffering. This week, the company pulled its first-quarter and full-year guidance due to the coronavirus crisis. Target has seen a surge in sales, but the growth has been driven by lower-margin essentials, while sales in higher-margin areas like apparel have declined significantly.
Since the crisis isn't over, and reports about its impact on earnings have just begun, it's likely that more declines are ahead for stocks. That doesn't mean we should avoid the entire retail sector. It's nearly impossible to catch a stock at its very lowest point, so our best bet is to buy when shares have reached a decent entry point. Since we are long-term investors, we know there will be some dips. But that's OK, because we are sticking around for gains further down the road.
Weathering the crisis
We also shouldn't turn our backs on companies like Target that are warning about COVID-19's impact, because the outbreak is a temporary situation. A better strategy is to examine how the retailer is weathering the crisis -- and what the retailer's sales, profit, and guidance looked like prior to it. Target is pausing share repurchases and postponing many store remodeling projects in favor of temporarily offering pay raises to keep its stores running through the crisis.
Another "good student" of the coronavirus crisis is Nike (NKE -0.53%). The company closed as many as 75% of its stores in China at the peak of the outbreak there and reported a 4% drop in fiscal third-quarter revenue in the region -- following 22 straight quarters of double-digit growth. At the same time, Nike managed to grow overall revenue by 5% for the quarter ending on Feb. 29, driven by a 36% increase in digital sales. Though Nike may face more coronavirus headwinds due to the cancellation of sports events and the temporary shutdown of stores elsewhere, it has started off in a position of strength.
So, it isn't too early to invest in retailers -- if we choose wisely. While investing in companies like Target or Nike is reasonable, now isn't the time to play recovery stories like apparel retailer The Gap or department store Macy's. Both companies were struggling with revenue declines prior to the coronavirus outbreak, so they came into the crisis in a position of weakness. Now their road to recovery may be much longer. For these retailers, and others in a similar situation, I want to see their strategy once the crisis is over before making any bets.