Retail Sector Investing ====================

By pjain      Published July 12, 2019, 10:19 p.m. in blog Invest   

Retail: Key Factors and Trends

WATCH - HIGH scale enough to compete

  • Strong market share growth - strong top line execution
  • Stronger margins - operating income dollar growth
  • Defensiveness against an unknown trade war with China
  • In a world of retail “winners and losers” big-box retailers will shoot up over the next year.
  • Years of investments finally paying off = to become true omni-channel retailers - both online and offline

  • ADVANTAGED by store closures bankruptcies of OTHER brick and mortar retailers

Trade War could cut margins - inventory bloat - supply chain changes

  • If forced to absorb 25% tariffs - not all could be passed on to consumers, it would hurt margins
  • But in any case, rise in prices would cause inflation and fears would cut sales considerably
  • Supply chain changes can be expensive

How will 10% on $300b consumer goods by Sep 1, 2019 impact retailers

  • Till now, the trade tensions have had more psychological impact, not hitting consumer pockets as most of the tariffs were on non-consumer goods, and the final 25% bump would only took effect took place June 2019.

Now, however, many consumer products, like clothing, shoes and electronics have been spared from the last three rounds of tariffs. But the remaining $300 billion of China-made goods starting Sep 1, 2019 will capture all of these - starting with 10% and if trade tensions continue likely to be raised.

Department Stores - private labels to cost more, but brands would eat most of tariffs in higher margins!

Department stores, like Macy’s, Kohl’s and Nordstrom initially hurt Aug 1-2, 2019 on Trump Sep 1 starting fast 10% on $300b of mainly consumer goods - these categories like apparel will now subject to the extra duties and much faster before this winter sales season!

  1. They sell a mix of national brands like Nike and Ralph Lauren along with their own private label and exclusive merchandise.

    Gap Inc. and L Brands both have around 20% sourcing exposure to China. Both retailers are mostly vertically integrated, meaning the goods sold are manufactured just for their own brands, which means there aren’t vendors help absorb, or split, the higher costs from tariffs.

  2. In the competitive retail space, many will restrain price increases, that are more elastic. In other cases, prices will rise. Macy's and Home Depot are employing similar product mix and pricing strategy.

  3. The national brands there may be some level of splitting the higher costs between the vendors and the department stores.

  4. Luxury goods "psuedo brands" to be unaffected - but East Asia sales likely to fall on "unpatriotic" shaming.

    Coach- and Kate Spade-owner Tapestry, and Michael Kors-parent Capri Holdings sold off a bit ~2% in reaction to pending tariffs.

Electronics - H2'19 to be hit hard

Up to Aug 2019, BBY the consumer electronics company has said tariffs impacted around 7% of the total cost of goods sold. But after Trump announced the 10% on remaining mainly consumer goods of $300b from China, its stock fell by 11%.

Discounters to Hurt more - fewer Rollbacks

Discounters like Walmart will have a more difficult time absorbing the tariffs along its supply chain, thus shoppers will have to bear more of that burden.

Shoes and Apparel - dying malls

In 2018, 42% of all U.S.-sold apparel was made in China, according to the American Apparel & Footwear Association.

Shoe-maker Steve Madden shares shed more than 12% in two days ending Aug 2 2019, and it is on a number of analysts’ watch lists as likely to be hard hit if tariffs are levied on shoes. This is because it doesn't have the same high margins as Nike, as 95% of its production is from China, as it stamps its "private label" on generic shoes.

Selectivity is vital

BJ’s, National Vision, O’Reilly Automotive, Tractor Supply

Auto Parts

BJ’s, Lowes, National Vision, O’Reilly Automotive, Tractor Supply and William-Sonoma

Comparison of Fundamentals

Sym . M $b $b . PEf RoA DE
AMZN 995 8% .8
WMT 326 4% .8
HD . 240 24% High
COST 124 8% .33
TGT 45 7% 1 .

Analysis of Survivors




Target is Goldman’s “best idea,” + sustained strong comp growth ” Jul 2019 ? Target has finally reached that turning point in their earnings trajectory they have been working towards for the last 3 years - GS


Speciality Retailers


  • Best small-cap idea because “the Club model continues to have the best attributes of all retail - GS


National Vision


O’Reilly Automotive


Tractor Supply



  • Most out of consensus idea > tariff concerns have scared investors away from the stock


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