Business has been tough for US retailers. Industry-wide challenges have resulted in weak performance across the sector, leading to widening credit spreads. In some cases, these movements have been excessive, providing opportunities for investors to gain exposure to attractively valued companies with strong credit profiles and effective strategies for adapting to change.
Challenging conditions: priced in, or leading to over selling?
Despite a supportive US economy, with improving macroeconomic data and rising consumer confidence, retailers have suffered. This is primarily due to secular changes in the industry, which include: consumers’ growing preference for experiences instead of clothing, declining tourist numbers (and therefore holiday shoppers), unseasonal weather, and increasing competition from e-commerce pure players such as Amazon.
This has led the performance of speciality retailers and department stores to weaken in the past few quarters. Most have reported worsening like-for-like store sales, and increasing competition has forced prices – and hence operating profit margins – down. Some have responded by closing bricks-and-mortar stores to adapt to the growth of online shopping.