With the biggest shopping day of the year upon us, the annual Black Friday shopping maelstrom will be closely watched by many investors looking for some signs that indicate what the future holds for the brick-and-mortar retail stores. Despite posting respectable overall third-quarter earnings results, most retail stocks were beaten down last week as investors continue to express ambivalence about the long-term future of the traditional mall anchor stores. Though it is not explicitly stated on earnings conference calls, the specter of the Sears (SHLDQ, Financial) bankruptcy has cast a dark and ominous cloud over the entire brick-and-mortar group.
Examples of the lukewarm sentiment investors exhibited toward the retail sector abounded: Home Depot (HD, Financial), Macy’s (M, Financial) and Walmart (WMT, Financial) each endured steep stock price drops despite posting relatively robust earnings. Investors shrugged off Macy’s impressive sales growth and the stock fell 7.2%. Walmart’s increase in quarterly sales was met with a similar insouciance and its shares ended down 5.7% for the week. Home Depot was not spared, its shares were down 4.6% for the week despite posting upbeat results.
One of the reasons for analysts ho-hum attitude towards the sector is Amazon (AMZN, Financial) has induced a cycle of creative destruction on the industry and all of the chain stores have been forced to navigate choppy and perilous waters; some are better at the helm than others; and this Black Friday may determine who ends up on the rocks and who sails free.
The reason this year’s Black Friday is significant is that, for many retailers, it will be perhaps their last opportunity to demonstrate their ability to remain viable in a world where online sales continue to rise. However, brick-and-mortar chains have been operating in an Amazon world for the past 10 years; they have had ample time to adopt and change their business models to survive in the new 21st century retail environment. Economic Darwinism is now the order of the day.
Traditional retailers for the past several years have been doing business in what can only be described as a retailer’s dream. Unemployment is currently at its lowest level since 1969; interest rates remain relatively low; consumer confidence and spending has remained historically high and the economy has been robust for many years and still shows no signs of slowing down. Stores should be thriving with these economic tailwinds at their backs.
Black Friday will shine a light on those retailers who are struggling and may provide a signpost on whether those who are operating in the red or on the margin can survive.
The thinking among many analysts is that if retailers can’t operate successfully in this ideal economic environment, then the problem isn’t Amazon or the prevalence of online shopping, it’s the chain stores inability to adopt in a manner that will ensure long-term survival, especially if an economic downturn ensues.
The challenges all traditional retail stores face today is how to operate in a world where online sales continue to increase, but shoppers have demonstrated they are still willing to visit the stores.
The retailers that will surmount these challenges will be those who have affected a strategy that judiciously strikes the right balances between carefully offering promotions that reduce operating margins while boosting their online operations to provide shoppers an omnichannel hybrid experience that responds to their preferences.
After having had many years to make the appropriate adjustments to their traditional operating models, this year’s Black Friday is propitious as it will offer investors a way to assess who has made the shift in an Amazon online world and who has failed to do so.
Some of those retailers who will be under the gun include J.C. Penney (JCP, Financial), whose stock is down nearly 60% this year. The company continues to struggle, posting a $151 million quarterly loss. Jill Soltau, J.C. Penney’s CEO, said the store needs to do a better job getting rid of excess inventory and understanding what its customers want. For investors, those are not words that inspire great confidence.
Bed Bath & Beyond (BBBY, Financial) lost nearly 35% and recently posted a dismal earnings report that heightened the unrelenting pressure from e-commerce and led Standard & Poor’s to reduce its credit rating last month.
The traditional retail sector faces many challenges heading into the make-or-break Black Friday shopping extravaganza. No one knows which companies will allay investor concerns and which will make a bleak picture even darker. One thing is for certain: only the strong will survive.
Disclosure: I have no position in any of the securities referenced in this article.
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