The U.S. consumer is clearly in a better mood these days. Total retail spending rose 5.5 percent in the fourth quarter, according to the National Retail Federation. That’s the highest rate of holiday spending growth since 2014.
And the outlook for the year ahead is equally bright. Despite a soft start for retail spending in 2018, look for better times ahead in the coming months. “Shoppers still seem ready to open their wallets later in the year, as consumer confidence remains high and pay packets are getting a bit fatter thanks to individual tax cuts,” according to a report from The Conference Board.
Echoing that improving sentiment, a broad range of retail stocks have moved up off of their multi-year lows seen last fall. The SPDR S&P Retail ETF (XRT), which is the category’s largest with $337 million in assets, has rebounded roughly 15 percent from its November 2017 lows.
Rather than apologize for past market share losses to mighty Amazon.com and other online sellers, traditional bricks-and-mortar retailers suggest they can now beat back the e-commerce juggernaut with a hybrid stores-and-website approach.
Target COO John Mulligan, for example, thinks consumers will increasingly prefer to buy online and pick up their items at local stores. He recently told Barron’s that his company, which has 1,800 locations, has a store “nearly 10 miles from every doorstep in America.”
Pursuing an omni-channel strategy doesn’t come cheap. “Retailers are facing heavy investments in their stores, labor and e-commerce channels,” says Patrick O’ Hare, chief market strategist at Briefing.com. “That’s going to impact profitability in the near-term.” He calls retail “a bit of a ‘Lazarus trade’, they’ve risen from the dead but still have a lot to prove.”
It's not like retailers have the liberty of standing still. Any retailer that fails to build a robust online presence may struggle to survive as e-commerce sales continue to grow at a relatively faster clip, and as mall traffic continues to decline.
Against that backdrop, ETFs such as the SPDR S&P Retail ETF may be more value trap than turnaround play. The XRT fund, which has a 0.35 percent expense ratio, is valued at 14.3 times forward earnings, roughly three percentage points below the broader S&P 500 average.
The fund tracks a modified equal-weighted index, spread across 10 retail sub-sectors such as apparel, supermarkets, drug stores and department stores. Perhaps a more focused approach to the industry transition is called for.
That’s the aim of a pair of new ETFs that were launched this past November. The ProShares Decline of the Retail Store ETF (EMTY) holds a short exposure in the Solactive-ProShares Bricks and Mortar Retail Store Index. This index focuses on retailers that still derive the vast majority—at least 75 percent—of sales from their traditional stores.