Schwab Sector Views: Is Retail Really Dead?

Schwab Sector Views is our three- to six-month outlook for 11 stock sectors, which represent broad sectors of the economy. It is designed for investors looking for tactical ideas. We typically update our views every two weeks.

It seems like a daily fixture of the business news: Another retailer announcing it is closing stores, warning of declining sales or declaring bankruptcy. Business Insider reported that nine retailers have already filed for bankruptcy this year, equaling the number for all of last year, while more than 3,500 individual stores are expected to close in the next few months. There is no doubt that online shopping has changed the way Americans consume, and many industry observers have been sounding the death knell of “brick and mortar” retailers for some time. But is this really a terminal case?

Regular readers of this column know that when one side of the boat starts to get heavily loaded, we at least want to take a glance at the other side. For some perspective, let’s go back in American history some 50 years or so. Coffee was, as it is now, a relatively ubiquitous American beverage consumed by millions. What was different was that most of it was brewed either at home or work, or picked up from a fast food restaurant or gas station. There was no reason to think Americans would suddenly stop enjoying the convenience and “quality” of instant coffee at home. (Who can forget “the best part of waking up…?”) Who could have guessed that people would prefer to go wait in line in a shop for the privilege of paying substantially more for that same caffeine fix? Well, many of you reading probably did just that this morning, so you can supply your own answers, but quality and the “experience” likely have something to do with it.

So it might seem for retail: Why would people leave their homes to go out in the world, find a parking spot, walk through a retail location, only to pay the same or even a bit more for similar products…it’s a no brainer, right?

We urge investors not to make such a leap at this point. There is no doubt that the retail landscape is changing, but that doesn’t mean traditional retailers are dead. There will be winners and losers, as we’ve already seen, but the idea that retail is dying seems a bit far-fetched to us.

First, consider the landscape. The American consumer remains relatively healthy in our view, with increasing wages, low unemployment and high confidence.

 

Higher wages…

Source: FactSet, Federal Reserve Bank of Atlanta. As of Apr. 24, 2017.

…and low unemployment…

Source: FactSet, U.S. Dept. of Labor. As of Apr. 24, 2017.

…are likely helping boost consumer confidence

Source: FactSet, Conference Board. As of Apr. 24, 2017.

So what will it take to make brick and mortar retailers healthier? First, we believe excess retailing capacity needs to be pared back—and there are signs that’s finally happening. Some of the weaker performers needed to go, allowing stronger performers to gain market share. The rise of mobile device-based shopping also creates opportunities for retailers that can successfully integrate their physical locations with a mobile platform. A report by retailer researcher bazaarvoice found that shoppers who interact with a retailer via multiple channels, such as through a mobile device and by visiting an actual store, spent 18-36% more than those who dealt with just one channel, no matter what that was—leading us to believe there is a place for both. And, judging by the coffee situation and other trends we are seeing in the marketplace, experience is becoming a more important part of the shopping situation.

Throwing products out on a table and waiting for people to come and get them is likely not going to work very well anymore. There are too many options out there. Take candy as an example. People can buy candy just about anywhere—online, at supermarket, at a gas station—it’s one of the easiest products to come across for most folks. So who would be crazy enough to open a candy store requiring people to make a special trip? Well, there are two examples in my home town, Denver, that illustrate to me that retail isn’t dead. While different in tone, they both have similar foundational characteristics. First, they have employees who are enthusiastic and friendly, at least appearing to enjoy their jobs and wanting to help you in any way they can. (I know—unbelievable!) They also offer unique experiences, one with upbeat, old-time music playing that everyone can get into, and a huge variety of sugar-laden treats laid out in a fun and attractive way, while the other is in the model of an old-time candy shop, with a ’50s vibe and unique creations. It’s an experience!

It is our belief that there will be opportunities in retail as we move forward. Shoppers will still want to be able to try on clothes, see the merchandise in person and have helpful, friendly sales people assist them. Anyone that has tried to do a plumbing project, at least with my level of skill, knows that there will be at least a half dozen trips to the hardware store in the course of a day—and even overnight shipping isn’t good enough!

For investors, it doesn’t always pay to be contrarian—those who thought that buggy whips would stage a comeback because newfangled motorized vehicles were mere flashes in the pan were likely pretty disappointed. And there is no doubt that the retailing sector faces more turmoil. But to us, the bad news seems to be pretty prevalent at this point. There are opportunities in the retail space for those investors looking for potential unloved areas, and who have the patience and desire to do the research. It’s not for everybody, but for those inclined to look more closely at this industry, the American retailer may be on the cusp of a renewed uptrend as a trimmed down and modernized industry reinvents itself.

Schwab Sector Views: Our current outlook

Sector

Schwab Sector View

Date of last change to Schwab Sector View

Share of the
S&P 500 Index

Year-to-date total return as of 04/25/2017

Consumer discretionary

Marketperform

07/17/2014

12%

10.41%

Consumer staples

Marketperform

05/07/2015

9%

8.49%

Energy

Marketperform

11/20/2014

7%

-8.13%

Financials

Outperform

05/07/2015

15%

3.08%

Health care

Outperform

01/26/2017

14%

8.95%

Industrials

Marketperform

01/29/2015

10%

7.03%

Information technology

Outperform

04/29/2010

22%

14.63%

Materials

Marketperform

01/31/2013

3%

8.41%

Real estate

Underperform

01/26/2017

3%

5.07%

Telecom

Underperform

09/12/2013

2%

-6.08%

Utilities

Underperform

05/23/2013

3%

7.74%

S&P 500®  Index (Large Cap)

 

 

 

7.34%

Source: Schwab Center for Financial Research and Standard and Poor’s as of 03/31/17.

Clients can use the Portfolio Checkup tool to help ascertain and manage sector allocations.

What is Schwab Sector Views?

Schwab Sector Views is our three- to six-month outlook for 11 stock market sectors, which are based on the 11 broad sectors of the economy.

The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:

  • Outperform: Likely to perform better than the rest of the market.
  • Underperform: Likely to perform worse than the rest of the market.
  • Marketperform: Likely to track the broad market.

How should I use Schwab Sector Views?

Investors should generally be well-diversified across all stock market sectors. You can use the Standard & Poor’s 500 allocations to each sector, listed in the chart above, as a guideline.

Investors who want to make tactical shifts in their portfolio can use Schwab Sector Views’ outperform, underperform and marketperform ratings as a resource. These ratings can be helpful in evaluating and monitoring the domestic equity portion of your portfolio.

Schwab Sector Views can also be useful in identifying stocks by sector for potential purchase or sale. When it’s time to make adjustments, Schwab clients can use the Stock Screener or Mutual Fund Screener to help identify buy or sell candidates in particular sectors. Schwab Equity Ratings also can provide an objective and powerful approach for helping you select and monitor stocks. 

Next Steps

Talk to Us
To discuss how this article might affect your investment decisions:
-          Call Schwab anytime at 877-338-0192.
-          Talk to a Schwab Financial Consultant at your local branch.

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