Black Friday and the fourth-quarter is generally when retailers make most of their money, and given how retail stocks have performed this year, they’re going to need every penny that shoppers will fork over this holiday season.
It’s no secret retailers are suffering, particularly brick-and-mortar stores, hard hit by a combination of a rise in ecommerce shopping and Americans’ changing tastes in what they buy.
That’s seen in exchanged-traded funds like SDPR S&P Retail (XRT), which is down 4.5 percent year-to-date, as retail is one of the few losing subsectors in an otherwise overall bullish year for equities. The fund’s top-three categories—apparel and accessories, automotive and department stores—represent the most unloved areas of retail and make up 50 percent of its holdings. XRT has $566 million in assets under management and an expense ratio of 0.35 percent.
XRT might be down currently, but price charts show it normally rises into the year’s end (except for 2008 and 2015), likely in part to retailers benefitting from successful holiday-sales seasons. Will this holiday season goose the gains for XRT once more?
There are signs shoppers are buying. The U.S. Commerce Department said October retail sales data rose 0.2 percent, higher than the consensus expectations for a flat reading. IHS Markit forecasts holiday retail sales will rise 4.1 percent above 2016, stronger than last year’s showing of a rise of 3.6 percent and significantly stronger than in 2015. Holiday retail sales in 2017 are expected to reach almost $683 billion, IHS Markit says.
However, Deloitte expects this year to be the first time that consumers will spend more of their holiday budget online than in physical stores, which may not help retailers’ bottom lines.
That leaves the question of whether beaten up retailer ETFs are a value play ahead of the year-end, or if this year will buck the usual trend of retailers shoring up their fiscal year thanks to holiday buying.
“Is this the year where we see more evidence of the problems of brick-and-mortar stores, based on how their sales do on Black Friday?” asks Brett Manning, senior market analyst at Briefing.com. “That’s what it comes down to.”
Shopping may be going under a structural change, he says, which could affect physical retailers. And there are two new ETFs from ProShares that are betting on the downfall of physical stores—the Decline of the Retail Store ETF (EMTY) and Long Online/Short Stores ETF (CLIX). Both funds trade on the NYSE Arca exchange and both come with expense ratios of 0.65 percent.
Retailers are lagging because of ecommerce competition, Manning says, but many investors overlook the improvements physical retailers have made with inventory management and other supply-chain logistics.