Muted Retail Growth to Move Higher? How to Play the Sector Minus Risk
Retailers continue to fight for the limited dollar of the consumer. The retail sector is extremely competitive and success is contingent on the right strategy of attack, which means offering the right product mix, competitive pricing, and in the ultra-competitive apparel sector, it means keeping on top of the trends and consumer sentiment.
A good product today could be passé a year from now, as consumer sentiment changes rapidly.
Why Target Failed in Its Canadian Expansion
Target Corporation (NYSE/TGT) beat Wall Street estimates on Wednesday, despite recording a massive $5.1-billion charge after deciding to exit Canada in what has to be one of the biggest blunders in retail history. The reality is that it wasn’t the Canadian consumer sentiment that choked Target, but the company’s mistake in its expansion plans, the first outside of the United States.
Other major retailers, such as Wal-Mart Stores Inc. (NYSE/WMT), The Home Depot Inc. (NYSE/HD), Lowes Companies, Inc. (NYSE/LOW), The Gap, Inc. (NYSE/GPS), and Best Buy Co., Inc. (NYSE/BBY) to name a few, have managed to expand successfully in Canada after understanding the consumer sentiment there.
Target simply did a bad job in not only its expansion after buying up locations via its purchase of troubled Zellers, but also its exit. The company operated poorly in Canada and failed to grasp the consumer sentiment there. My view is that Target should’ve kept some of its own developed stores in good locations and made the experience better for the Canadian shopper. It didn’t, so here we are. Projected sales growth of 1.6% for FY16 doesn’t offer much comfort.
Retailers Stalling, but Could Edge Higher
The reality is that many of the major retailers are stalling, with muted growth as consumer sentiment stalls. But they’re still trading near their highs, so the prospects are thin, just like the margins.
Wal-Mart continues to face slackened consumer sentiment globally. Sales are estimated to grow 1.7% in FY16 and 2.8% in FY17, according to Thomson Financial.
Macy’s, Inc. (NYSE/M) is expected to see its sales grow at two percent in FY16, followed by 1.5% in FY17. Again, not exactly growth you can get too excited about.
Home Depot is trading above $115.00 and is the “Best of Breed” in the building supplies market. Its sales growth of 4.5% and 3.8% for FY16 and FY17, respectively, are better than Wal-Mart’s, Target’s, and Macy’s. But at this price point, you have to be somewhat concerned about the valuation.
Yet as long as jobs are created and consumer sentiment is good, we could see the retail sector edge higher.
How to Play the Retail Sector Without the Risk
Now, if you don’t like the risk of selecting the retail stocks to buy, you could play the broader market for consumer spending and consumer sentiment via an exchange-traded fund (ETF) like the SPDR S&P Retail ETF (NYSEArca/XRT). This ETF comprises 76% in consumer cyclical stocks and 20% in consumer defensive stocks.
With an ETF like this, you gain access to a broad cross-section of the consumer retail sector. Some of the top holdings include Netflix, Inc. (NASDAQ/NFLX), Amazon.com, Inc. (NASDAQ/AMZN), Big Lots, Inc. (NYSE/BIG), The Pantry, Inc. (NASDAQ/PTRY), The Kroger Co. (NYSE/KR), Rite Aid Corporation (NYSE/RAD), and Sprouts Farmers Market, Inc. (NYSE/SFM).