Digging into the Digital Details

January 23, 2020

Source: Bloomberg Source: Bloomberg

Consumer spending accounts for roughly two-thirds of the country’s gross domestic product. As such, both equity and fixed income market participants closely track this data as a key indicator of the health of the economy. This past holiday season, the American consumer continued to exhibit strength, with total retail sales up 3.4% and online sales up 18.8%, according to the Mastercard SpendingPulse. Notably, retailers generated these strong sales despite there being five fewer shopping days after Thanksgiving in November 2019 than in November 2018. In contrast to this strong fundamental picture, several high yield retailers including JC Penney, L Brands and Party City, as well as department stores such as Kohl’s, pre-reported lighter-than-expected holiday sales. As shown in this week’s chart, one of the key factors influencing this dichotomy is consumers’ continued preference for online shopping. The 2019 holiday season saw a dramatic year-over-year decline (-8.7%) in brick-and-mortar sales. Retailers with well-executed online strategies are seeing the benefits of the strong consumer, whereas those without a well-executed digital presence are left out of the mix.

Investors betting on retail businesses in the middle of a turnaround are well served to analyze credits from a bottom-up perspective, with a keen eye on the specifics of digital strategies. Through their seasonal commentary, companies have made it clear that a few online features are key traffic drivers. For example, “Buy Online, Pickup in Store” has consistently led to higher sale volumes, leveraging companies’ physical footprints while offering consumers expediency. Retailers note “Reserve Online, Pickup in Store” doesn’t capture the same amount of traffic, with the hassle of the additional wait time at the cashier. Companies with the wherewithal to target consumers based on demographics and past shopping habits often see the benefits of personalized outreach. Those that don’t, and instead inundate consumers with generic marketing, risk brand deterioration and customer frustration. Retailers that offer customers cheap and fast shipping options can earn a larger share of wallet from a population that has gotten used to immediacy. Several retailers in the investment-grade and high yield space are in the midst of a turnaround. As we enter this earnings season, I will be paying close attention to the specifics of each company’s past and future online strategy. 

Key Takeaway      

Despite strong retail sales during the 2019 holiday season, brick-and-mortar retailers continue to struggle in the increasingly digital economy. Successful execution of an online strategy drives the continued bifurcation between winners and losers in the retail industry. Investors would be wise to closely scrutinize retailers’ digital strategies.

Tags: Retail sales | Consumer spending | e-commerce | holiday sales

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