Most people are well aware of the woes affecting the retail industry. Brick-and-mortar retailers like JCPenney, Macy's and Target have been battered due to disappointing sales and increasing competition from online retailers such as Amazon.
Many of these companies—which have been around for decades in some cases—have seen their share prices decline by more than half in the past year alone.
Now with the all-important holiday shopping season swinging into full gear, investors are wondering whether there's opportunity in the beaten-down industry and if so, how best to capitalize on it.
Americans Eager To Spend
One thing that's certain is that the troubles facing retailers has nothing to do with Americans' appetite to spend. Consumers in the country are usually eager to reach into their wallets and buy things, especially during the holidays, a period that accounts for about 20% of retailers' total sales for the year.
That appetite to spend is likely to continue in 2017. According to a survey from the National Retail Federation (NRF), consumers may spend an average of $967.13 this year during the holiday shopping season. Total retail sales (excluding automobiles, gasoline and restaurants) during the months of November and December may increase 3.6-4% from last year to as much as $682 billion.
Source: National Retail Federation
If that comes to fruition, it would mark the fastest growth in holiday retail sales since 2014, when they jumped 5%.
“Although this year hasn’t been perfect, especially with the recent devastating hurricanes, we believe that a longer shopping season and strong consumer confidence will deliver retailers a strong holiday season," said the NRF CEO Matthew Shay.
Online Eclipses In-Store
The NRF's survey includes all retailers, whether it be brick-and-mortar or online. That's why it paints a rosy picture for holiday sales even as many retailers with physical stores struggle.
In fact, the NRF forecasts that online will become the most popular destination for holiday shopping for the first time ever in 2017, with 59% of consumers responding that they will make purchases on the web this year.
That surpasses department stores, where 57% of consumers are expected to shop; discount stores, where 54% of consumers may shop; and supermarkets, where 46% of consumers say they will shop.
Online sales are also anticipated to grow much faster than overall retail sales this season. According to market research firm eMarketer, e-commerce sales may jump by 15.8% during the holiday season.
Those rapid rates of growth may continue for the foreseeable future as online sales still only account for about one-tenth of total retail sales.
There are many companies benefiting from the growth in online shopping, but one company is far and away the leader: Amazon. Sales at the online retailer accounted for 38% of all e-commerce sales during last year's holiday shopping season, and some estimates suggest the company's share could rise to as much as 44% this year.
Amazon's dominance has not been lost on investors. Shares of the company are up 50% this year and 400% over the past five years. The stock has rallied so sharply that it's been the make-or-break factor for two of the biggest retail ETFs.
The largest fund in the space, the $419 million SPDR S&P Retail ETF (XRT), is down 8.9% this year, compared with a 9.2% gain for the $51 million VanEck Vectors Retail ETF (RTH). Over the past five years, the difference is even starker: XRT is up 38.5%, and RTH up 104.8%.
20% Of Portfolio
What’s the biggest factor driving the divergence? Amazon. The online juggernaut represents 20% of RTH's portfolio, compared with a little over 1% for XRT.
That's by design. RTH holds a market-cap-weighted basket of the 25 largest U.S.-listed retailers. XRT holds an equal-weighted basket of all retailers in the S&P Total Market Index.
Of course, Amazon isn't the only stock driving the divergence. RTH's outsized positions in other retail juggernauts that have been successfully muscling their way into the online space—such as Home Depot and Walmart—have also served it well.
At the same time, RTH holds only tiny positions in stocks of struggling department stores such as Macy's and Kohl's.
‘IBUY’ Leads ETF Pack
As well as RTH has done this year, it's not the best-performing retail ETF of 2017. That title belongs to a newcomer, the $134 million Amplify Online Retail (IBUY) ETF, which launched in April 2016 and is up 32.9% so far this year.
YTD Returns For IBUY, RTH, XRT
Unlike the other two retail ETFs mentioned, IBUY focuses exclusively on online retailers. Also unlike the other two, the ETF has a global scope—though U.S. stocks account for 80% of the fund's holdings.
Interestingly, Amazon has a current weighting of only 3.6% in the fund, illustrating that the growth in e-commerce is much broader than just one company. The ETF's current top holdings include Lands’ End, Carvana and Stamps.com.
IBUY's unique take on the retail industry has resonated with investors, who added $106 million into the ETF this year. However, it's not the only retail ETF seeing buying this year.
The aforementioned XRT has seen inflows of $250 million this year, even as the price of the fund has dropped. Perhaps some investors are betting that the decline in the brick-and-mortar retailers that dominate the portfolio of XRT is overdone.
The Bull Case
Whether that bet pays off depends on how the outlook for brick-and-mortar retailers evolves from here. Dana Telsey, CEO of Telsey Advisory Group, and an expert on retail, has a relatively optimistic outlook for the industry, at least compared with most analysts.
"When you look at the same-store sales, the expectations are so low now that any little pop" makes the stocks trade much higher, she told CNBC, while adding that the group was "under-owned."
Case in point: On Thursday, shares of Macy's rocketed higher by more than 10%, even as same-store sales fell by a larger-than-expected 3.6% in the third quarter. The company reported better earnings than analysts had forecast thanks to cost cutting.
The enthusiasm about the Macy's rebound on Thursday spread to other retailers. Shares of JCPenney and Dillard's both soared almost 10%, while the XRT ETF climbed 2% on the session, outpacing IBUY and RTH, which were each trading close to unchanged.
Not So Fast
On the other hand, a recent report from Bloomberg warned that the worst of the downturn in retail is yet to come. According to the report, retail chains have more problems than just the shift to e-commerce.
"The root cause is that many of these long-standing chains are overloaded with debt—often from leveraged buyouts led by private equity firms," said the authors of the report.
They pointed to Nordstrom's inability to go private because of the lack of cheap financing and the bankruptcy of Toys ’R Us as just the beginnings of a retail “apocalypse” that will lead to accelerated store closings and many defaults in the coming years.
If that's the case, the bump in XRT may end up being a temporarily blip on a larger downtrend, rather than a sustainable turnaround for the ETF.
Contact Sumit Roy at [email protected]