If there was any doubt that the economic recovery was real, the March retail sales report put that to rest.
According to the Census Bureau, retail sales jumped 9.8% last month, its fastest pace since the snap-back that followed the lockdowns last spring, and much better than estimates at 5.5%. Adjusted retail and food services sales reached $619.1 million, a record for a single month, fueled by stimulus checks and accelerating vaccination rates. More than a year after the pandemic hit, it's clear that Americans are eager to spend again and return to their pre-pandemic habits.
In addition to offering a valuable window into the performance of the American economy, the retail sales report also sheds light on how the many subsectors of the retail industry are performing. Let's take a look at some of the winners and losers emerging during the early stages of the recovery.
1. Consumer discretionary is on fire
There's no question that consumer staples categories like groceries, cleaning supplies, and paper products were the big winners during the pandemic, especially in the initial lockdown phase, but the balance in retail spending is starting to shift toward discretionary categories. Among the biggest winners in March were apparel, where sales were up 18.3%; sporting goods and related stores, which saw sales jump 23.5%; and auto vehicles and parts, which experienced 15.1% growth.
Clothing store sales are now above pre-pandemic levels, and even department stores sales were up sharply, rising 13%. That's good news for retailers like Macy's (NYSE:M) and Nordstrom (NYSE:JWN), which have been hit hard by the pandemic, although their stocks have bounced back on optimism for the recovery.
The best-performing category was sporting goods, hobby, musical instrument, and bookstores. That's a good sign for retailers like Dick's Sporting Goods (NYSE:DKS), which has been a surprise winner during the pandemic as the crisis sparked interest in sports and outdoor activities with social distancing measures in place.
The home improvement segment also continues to look strong with sales in the category up 12.1%, showing Home Depot and Lowe's are still getting tailwinds from the crisis.
2. Food spending is shifting to restaurants
Restaurant spending, especially for independent operators and casual dining chains, was crushed by the pandemic, but as more Americans get vaccinated and warmer temperatures arrive, there are signs of a thaw in the industry.
Sales at food services and drinking places were up 13.4%, a sign restaurants are beginning to recover, and sales are even approaching pre-pandemic levels, down only around 5% now. Meanwhile, grocery stores were the worst-performing category during the month, with sales rising just 0.5%.
That shouldn't be surprising, as increased spending on supermarket staples was driven by Americans spending more time at home. Food spending should begin to shift back toward restaurants now, especially as the weather continues to improve and social distancing measures become relaxed as more people get vaccinated.
That could present headwinds for supermarket chains like Sprouts Farmers Market and Kroger, and even diversified retailers with strong grocery businesses like Walmart and Costco, especially as they lap a strong 2020. There's also evidence that Americans may be working through supplies they've hoarded during the pandemic. In fact, toilet paper sales have now fallen below pre-pandemic levels.
3. E-commerce sales may be weakening
Online retailers thrived during the pandemic as brick-and-mortar stores closed or reduced their hours, and Americans fearful of contracting the virus shopped from home when they could.
However, the March report showed that sales growth in "nonstore retailers" (as the Census Bureau classifies the category) grew just 6%, less than the overall retail growth rate, which follows a similar pattern in February.
That means that the boom in online retail may be coming to an end, which could present challenges for high-flying e-commerce stocks like Etsy, Shopify, and Wayfair that have been among the biggest winners during the pandemic.
Americans who enjoy shopping in stores may be anxious to return to the habit, and after spending so much time shopping online over the last year, many shoppers may be fatigued with e-commerce.
While the category will continue to grow over the long term, there's likely to be a regression to the mean, favoring brick-and-mortar retailers while cooling off growth at e-commerce chains and spending more time in front of a screen.
One month's report isn't necessarily a trend, and the March numbers could be an anomaly, especially given the effect of the stimulus checks and the February winter storm, which dampened growth the month before.
However, investors may want to take a look at undervalued stocks in the sectors that are on the rebound, including auto parts chains like O'Reilly Automotive, apparel stores like Foot Locker, and even sporting goods chains. While travel and entertainment may be the obvious beneficiaries of the coming wave of pent-up demand, plenty of retailers should get a boost as well.