It’s no small wonder investors have chosen to overlook a banner 2018 for many retailers and focus on growing fears of a U.S. recession — and subsequent impact on U.S. consumers — in 2019.
Bad news just sells, right?
That focus on the negative is unfortunate as 2018 will go down as the year where the likes of Walmart and Target proved they can beat Amazon. More retailers showed vastly improved mobile shopping experiences and big sales gains on smartphones as a result (see booming Black Friday and Cyber Monday sales figures). Shipping products from stores to satisfy online orders is as pervasive as ever before. Retail inventory is nicely controlled, meaning sweeping markdowns are not the norm right now.
The VanEck Vectors Retail ETF has outperformed the S&P 500 (^GSPC) all year. At last check it was up 3.6% year to date versus the S&P 500’s 5% drop.
And above all else, a gainfully employed U.S. consumer put that extra item in the bag on Black Friday and Cyber Monday.
A full year of consumer spending strength has many retail experts Yahoo Finance talked with cautiously optimistic on 2019. Most acknowledge consumer spending will likely slow in 2019 as interest rates rise (credit costs go up) and stock prices become more volatile (hurting the wealth effect). But the prospect of a still healthy economy should translate to a better than decent year for many retailers.
“I think we are hearing a lot of talk about recession, but if you look at the [economic] indicators there really isn’t anything pointing to that,” Visa Chief Economist Wayne Best told Yahoo Finance. “Assuming continued volatility in stocks, but not a sustained drop, consumer spending won’t be much different early in 2019 than the fourth quarter.”
IBM’s Chief Scientist Dr. Michael Haydock predicts brick-and-mortar retailers in the U.S. will see a 3.04% year-over-year sales increase in 2019. Haydock sees online sales rising at an 11.6% clip from 2018.
Here are eight retail predictions from Yahoo Finance to get you thinking, and investing appropriately. For deeper analysis into the companies mentioned, check out the new Yahoo Finance Premium.
More than 100 JCPenney stores go dark
JCPenney (JCP) has been dreadfully slow to close lagging stores, but new CEO Jill Soltau will likely change that early on in 2019 following a comprehensive review of the business. Soltau could move quickly to close at least 100 stores to run JCPenney more profitable in the age of digital shopping.
An argument can be made Soltau has already signaled this to the market.
“We’re in the process of reviewing the store fleet as we do on an ongoing basis, but specifically at the end of the year each year right now, so that’s an ongoing process for us, and look forward to obviously updating you at the end of this year on our thoughts surrounding that,” veteran JCPenney investor relations head Trent Kruse told analysts on the latest third-quarter earnings call.
The reality is that given its poor sales trends in recent years, high debt levels and intense competitive environment JCPenney still has too many stores in operation (860). The company only closed 140 underperforming stores in 2017 under then CEO Marvin Ellison. By comparison, rival Macy’s (who is nicely profitable) has 690 stores.
Gap gets a new CEO
Gap CEO Art Peck made one not so succinct acknowledgement on the retailer’s recent third-quarter earnings call. That is he has been too slow to close underperforming stores.
“There are hundreds of other stores that likely don’t fit our vision for the future of Gap brand specialty store, whether in terms of profitability, customer experience, traffic trends,” Peck said. “These stores are a drag on the health and a drag on the performance of the brand.”
He added he will “quickly” address the situation. One should expect a fairly sizable store closing plan to be unveiled after the holidays.
Considering that mistake on stores, inconsistent performance at the Gap brand under Peck and Gap (GPS) stock down 30% since Peck took over in Oct. 2014, the board (which is stocked with three sons of founder Donald Fisher) will likely make a change. Old Navy has been rocking, so don’t rule out an executive from that operation taking the helm as CEO.
Sears finally dies
The dilapidated, bankrupt retailer finally will likely close all its doors for good after an awful holiday season. Creditors win out in bankruptcy court with the argument that Sears is worth more liquidated (aka dead) than alive. Former CEO and major shareholder Eddie Lampert officially goes down as one of the worst CEOs of all-time.
The liquidation of Sears in the first half of 2019 could cause problems for the likes of Best Buy, J.C. Penney and Target as consumers gravitate to liquidation sales. But these retailers gain prime position to benefit from Sears and Kmart no longer being around for holiday season 2019.
Amazon gets serious about physical stores
With a goal to reportedly open 3,000 cashier-less stores by 2021, Amazon (AMZN) gets cracking on this by opening at least 50 physical Amazon Go stores. Amazon has teased its growing appetite for retail stores throughout 2018. Leaks have crept up of interest in opening cashierless stores in airports. The company opened its “4 Star” store in New York City in the fall to hawk top trending online items to shoppers.
Nomura Instinet retail analyst Simeon Siegel thinks Amazon is a “compelling” buy for 2019, even without a store network.
Nevertheless, game on for the grocery budgets of hipster, urban millennials.
Amazon buys Kohl’s
Kohl’s (KSS) has seen success after launching Amazon return areas in its stores in the fall of 2017. The program has since expanded to 100 stores and is helping to bring in people who otherwise would not have visited Kohl’s. Earlier this year, Kohl’s launched a test of selling groceries in 10 stores in partnership with discounter Aldi.
In light of these efforts, Kohl’s realizes it could transform department store retailing by selling out to Amazon. Kohl’s CEO Michelle Gass knows well the power of Amazon — she worked in Seattle (Amazon’s home) for years at Starbucks and attended the University of Washington.
Get ready for Whole Foods Express stores inside your local Kohl’s. Sorry, Aldi.
Home improvement stocks get rocked
The cool-down in home prices and sales in 2018 — thanks to rising interest rates — has largely walloped housing stocks such as Toll Brothers. Home Depot (HD) and Lowe’s (LOW) have sidestepped the rout as consumers continue to spend on home improvement projects with their homes worth more than the bottom in 2009.
But the 2018 housing cool-down will likely lead to a slower pace of remodeling activity in 2019. In turn, that could mean slowing sales and earnings growth at Home Depot and Lowe’s and a sharp reaction by a Wall Street community that remains obsessed (aka too upbeat) with the industry.
“The housing market is starting to slow, that could possibly have an impact on home improvement stores and furniture stores — we will see slightly lower growth,” said Best.
Supply chains get uprooted
Under threat from the bruising U.S.-China trade war and rising costs to do business in China, retailers begin to exit the country. Production is increasingly shifting to Malaysia, India, Vietnam and where appropriate, the U.S. This will have a short-term impact on profits given the costs to put in new supply chains in often more expensive countries.
The great shift is already starting. CEOs of Funko, Hasbro and GoPro have told Yahoo Finance they will be moving some production out of China. Under Armour is also actively moving production to other emerging markets, too.
Second-quarter tax check spending boom
Changes to the U.S. tax code under the Trump administration could lead to a windfall for many consumers in 2019. UBS estimates that refunds will be up $40 billion to $70 billion (or 15% to 25%) year-over-year. If all of this is consumed, UBS thinks it would add 3%-6% to retail sales during the February to April period.
Married households with two children earning less than $40,000 a year will see the biggest increase in refunds on a percentage basis of 300%, UBS believes. Winners from this group’s greater propensity to spend include Dollar Tree, Dollar General, Walmart, Foot Locker and Ross Stores.
Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter@BrianSozzi
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