Retail winners and losers for when we can spend again

  • By Jack Hough,
  • Barron's
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After the pandemic passes, and the economy reopens, pent-up demand will turn into a torrent of growth, people tell me. But will it? I don’t feel a mounting desire to spend. Granted, it’s my first global quarantine.

What I’m feeling is hope that Italy has turned the corner, and dread that the worst is ahead for New York City, and America. I’m feeling stressed over trying to write, record a podcast, and do television from a downstairs playroom—toy overflow room, really—where I’ve set up a desk and equipment between a Hot Wheels Super Ultimate Garage and a stuffed Dumbo. I’m feeling concerned over my expanding quarantummy, and guilty for caring about a thing like that when many people have it so much worse. But eager to get back to the high life? Not so much.

“Every day that passes and we’re subject to corona restrictions is another day that consumers get used to a couple things,” Jefferies retail analyst Randal Konik tells me. “No. 1, they get used to staying at home. No. 2, they get used to buying online. And No. 3, they get used to just buying less.”

Konik wasn’t working from home when I spoke with him, and he wasn’t checking foot traffic at a nearby mall—those have been closed for weeks. He was sitting in his car in a Dunkin’ Donuts parking lot, where he has been shooting videos for clients. He has kids at home, like me. I told him he might see me soon, a couple of parking spots over.

Last week, I recommended that investors buy stocks for the long run, while diversifying. Some readers liked the optimism; others thought it foolhardy. Both have their points. Historically, the median bear-market decline from peak to bottom has taken 17 months, according to Goldman Sachs. If the recent bottom holds, it will mean this bear market lasted 23 trading days. That seems impossibly short, especially considering the severity of the drop, and the record rise in jobless claims.

But no one can say for sure where the bottom is, only whether shares look reasonably priced. They do. Investors who wish to buy individual shares rather than a mutual fund, however, should consider whether and how the economy will be left changed after the virus is gone. Let’s look for now at retail.

Many stores may never reopen. In a cover story last summer, when stores were closing at an elevated pace, even though consumer spending looked strong, I explained that the shift to online shopping was only part of it. America has by far the most square feet of store space per person in the world—four times as much as the United Kingdom at the end of 2018, and 10 times as much as Germany. Even before the virus, we were headed for another decade of widespread closures. Now, that reckoning will happen faster.

Konik is bearish on mall stores and department stores, understandably. One of his top pans is L Brands (LB), which sold a majority stake in its Victoria’s Secret chain in February and still owns Bath & Body Works. Be suspicious of high retail dividend yields resulting from collapsed stock prices, he says. Payment cuts are an easy way to preserve cash. Watch out for excessive debt, but don’t avoid all debtors, he says. He likes Grocery Outlet Holding (GO), because people will still buy food, and Planet Fitness (PLNT), because when gyms reopen, it will generate free cash and win market share with its low-cost memberships.

Konik doesn’t cover Dunkin’ Donuts, by the way—he just parks there. In the past, he has described himself as a permabull on consumer spending. Now he sounds more cautious.

Chuck Grom at Gordon Haskett says he hasn’t seen anything like this in 20 years of covering retail. It could take a couple of years for consumers to recover, he says, especially if the virus returns in the fall. He favors stores that cater to frugality, including warehouse club Costco Wholesale (COST) and closeout discounters like TJX (TJX) and Ross Stores (ROST), though they aren’t known for online prowess, which is important at the moment. He also likes Home Depot (HD), but says homeowners could stick to cheaper projects for a while. And while he doesn’t cover Amazon.com (AMZN), he calls it a winner for convenience.

Among stocks that Grom covers, he is most concerned for J.C. Penney (JCP), then Macy’s (M), then Kohl’s (KSS) and Nordstrom (JWN). “I don’t want to predict this, because I don’t want it to happen, but if J.C. Penney and Macy’s were to go away, that would be $35 billion in sales that would essentially come up for grabs,” he says. Walmart (WMT), Target (TGT), and discount retailers could be beneficiaries.

Retail investors should consider a barbell strategy, Grom says, with stores that can prosper during a downturn on one end, and ones that can bounce back during a recovery on the other. His bounceback favorites include Williams-Sonoma (WSM), Wayfair (W), and Tractor Supply (TSCO).

I wrote negatively about J.C. Penney here last summer, and Macy’s around Christmastime. Of course, I never expected anything like this. I recommended Kroger (KR) in February. It’s up 4%, versus a 24% decline for the S&P 500 index. Last August, in a positive look at pricey Grocery Outlet shares, I wrote, “Stick with a snack-size position and wait for a dip.” I couldn’t have caught a worse price with a time machine and a financial masochism fetish. It’s down 26%. Even the stuffed Dumbo is shaking its head. I’m not doubling down yet.

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