The Wild Retail Ride of 2016

2016 has been quite the year for retail.  Retailer share prices have taken a beating over the past 12 months.  The S&P Retail Select Industry Index is down 16.57% since June 2015, and the decline is affecting retailers nationwide and across all categories.

If you’re an investor, you have to either run for the exits or you have an iron will to hang on – most retail shares are down 10-20% for the year.  If that’s not bad enough, daily headlines add to the malaise.  The only chains reporting positive Q1 results are in the DIY (Home Depot, Lowe’s), food retail, and dollar store sectors.  The rest are in the red, reporting flat to negative sales and earnings.

All of this however is counter to macro-economic trends.  Economists are reporting a 3-4% rise in consumer spending.  Fuel prices, while starting to rise, are still pretty cheap.   The National Retail Federation is projecting retail sales to increase 3.1%, higher than the 10-year average sales growth of 2.7 percent.  Online sales are predicted to swell between 6-9% during 2016.

So what’s happening?  The malaise hasn’t engulfed the entire sector, and we see three trends driving the latest results.

1. Segment Shift: The DIY segment including Home Depot and Lowes is doing quite well.  Home Depot reported comparative store sales up 9%, and with Lowes up 7%.  Sure, it’s now summer, but those are big numbers given both retailers’ scale.  Clearly the consumer has shifted a good portion of spend to housing and home improvement.  We are also seeing growth in specialty grocery and food retail, where interesting innovations in this category are occurring and are performing quite well.  Other bright spots are in the dollar store, off-price, and factory outlet retail segment.  Retailers are continuing to grow the outlet channel as a way to supplement their core business.
2. Experiences are Winning Out Over Shopping: This is certainly a trend that has been well publicized; that the consumer is more interested in an experience versus a day at the mall.  The numbers seem to agree; according to Adobe’s digital index, airline and hotel bookings this summer are up 5.5% over 2015.  The National Restaurant Association has predicted a 5% increase in restaurant sales in 2016 over 2015, the highest percentage increase in a decade.  Clearly many consumers would rather be at the beach or dinner with friends and family versus shopping at the mall.
3. e-Commerce: A Channel of “Painful” Growth: Representing 10-12% of the business, US e-commerce continues to be a growth engine for retailers; sales in this channel were up 15.1% in Q1.  However, many retailers have learned this growth is coming at the expense of their brick and mortar channel.  As a result, retailers are closing unproductive stores (or better be) and launching buy online / pick up in store programs to give customers the convenience and a reason to come into the store – and hopefully buy something else.  In addition, in this world of Amazon, ultimate price transparency, and the new normal of free shipping, many retailers are struggling to squeeze any margin possible from this channel.

We believe 2016 will continue to be a wild ride for most retailers, and a painful reminder that you either adapt to these trends – or gradually, then sometimes suddenly – become irrelevant and die.