Second quarter earnings season is showing investors how COVID-19 is impacting the retail landscape, and examinations of the latest earnings reports can help investors make much better decisions in the future.
The health crisis is forcing people to stay at home more often, instigating a major disruption of brick-and-mortar sales. A sharp rise in unemployment presents a challenge to demand, but that appears more than offset by government stimulus and rising stock prices for the time being, especially among groups that are more insulated from job loss. Perhaps most importantly, the changing conditions are accelerating major structural shifts to the retail economy, the start of which predate coronavirus.
The most recent earnings reports from retail can be highly informative and educational for investors. This data provides an excellent case study for industries in crisis, as well as a general reading on the changing behavior of American consumers. This is also a major look into how the retail industry will continue to change in the coming years.
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People are buying online rather than in stores
The migration to online retail is an ongoing trend that has been drastically accelerated by the coronavirus. E-commerce represented a steadily growing portion of total retail sales going all the way back to 2000. Online retail generated only 4.2% of total sales in the first quarter of 2010, and this share grew to 11.3% by the end of 2019. Overall retail sales fell 3.6% year-over-year in the first quarter of 2020, while e-commerce rose 44.5%, according to the Census Bureau.
Recent reports from major E-commerce stocks illustrates this trend and acceleration. Behemoth Amazon (AMZN 1.30%) saw product sales increase 40% year-over-year. As Amazon goes, so too does e-commerce, as the company controls nearly 40% of the online sales market in the US. However, results elsewhere in the space showed that competitor platforms rivaled or exceeded the leader's growth. Etsy, Shopify, and eBay all reported enormous increases in gross merchandise sales (GMS) on their marketplaces. Wins were large and widespread across the category, speaking to an economywide shift that built upon an existing trend. Re-opening of stores in the coming months will likely dampen demand for online shopping, and next year these stocks might struggle to replicate the early 2020 boom, but much of this growth could be permanent.
Mixed outcomes across brick-and-mortar
Divergent fortunes characterized more traditional retailers this earnings season.
Operators of apparel stores and traditional sit-down restaurants, many of which were deemed non-essential, predictably suffered from sweeping closures and reluctant consumers. For example, TJX (TJX 0.45%) was slammed by store closures and even those stores that were able open endured substantially lower volumes due to changed consumer behaviors. Company management is expecting continued double-digit declines among open stores through the rest of 2020, so it seems that a full recovery is unlikely to be rapid. These trends are clearly not company-specific, as large players Ross, Burlington, and VF Corp all posted similar results with pessimistic outlooks.
Elsewhere, retailers of basic consumer goods, electronics, and home improvement exceeded expectations and reported strong results. Walmart (WMT -1.75%) was one such positive story. The big-box leader's U.S. same store sales rose more than 9%, as the company's online channel nearly doubled year-over-year. The diversified product mix, resilient supply chain, and ability to stay open all helped to drive superior performance to the major apparel and shopping names. Again, these trends represented economic shifts rather than individual company performance. Target, Costco, and Best Buy echoed the trends of increasing online sales growth and demand for basic goods. It remains to be seen whether these shifts in consumption habits can be sustained if the economic crisis lingers or deepens, but the data indicates that consumers are still active despite changing how they shop.
Tying it together
The evolving retail landscape can teach investors about how to manage crises, and it also provides clues about what to expect from the U.S. economy in upcoming quarters. Economic crises tend to be temporary diversions with permanent ramifications, with both winners and losers, and investors who can identify these trends early are more likely to reap the rewards.
The move toward e-commerce propelled many retailers beyond Wall Street estimates, indicating a permanent acceleration of evolving consumer preference and corporate capacity to deliver through that channel. People are becoming more comfortable operating remotely from the home with technology, which is relevant across industries besides retail. Tech-enabled solutions for remote interaction have no doubt won the day, and the market recognizes this.
A deeper look at the data reveals a cloudier picture, however. The lack of earnings guidance form top retailers is evidence of continued uncertainty, and the consumer may be temporarily buoyed by fiscal stimulus and falling interest rates. Worrisome consumer confidence figures in August could signal a rough year ahead for the market.
Strong results also may have come at the expense of small brick-and-mortar businesses that are common in the food and retail services industries, casting doubt on the stability of those business owners and their employees. This would have major ramifications for employment, consumer behaviors, and the performance of numerous stocks, the effects of which have the potential to extend for years or decades. Investors who anticipate these shifts are in position to generate outsized returns.
