Wall St Week Ahead-Investors caught in crossfire of fight for holiday shoppers
By Trevor Hunnicutt
NEW YORK, Nov 21 (Reuters) - Investors would normally be
thankful for a strong U.S. economy, yet this holiday season they
worry retailers may have to spend heavily to win, leaving
shareholders with a lump of coal.
Steep discounts are as familiar a sight during the holidays
as rich desserts, but this year so is a fierce grab for a slice
of the e-commerce market as Amazon.com Inc and Target
Corp offer free shipping for small purchases.
Underwhelming earnings reports this week from Target to
department store Kohl's Corp and home-improvement
specialist Lowe's Cos Inc reminded investors that U.S.
tariffs on imported goods, fickle consumer tastes and
competition could eat away at profits this year. Shares of
Target fell 10 percent on Tuesday as the company said profit
margins declined due to growing investments in boosting its
online business, wage increases, price cuts and the higher cost
of preparing and shipping orders.
"The retailers and e-commerce players are duking it out,"
Shawn Kravetz, Esplanade Capital LLC's chief investment officer,
said at the Reuters Global Investment 2019 Outlook Summit in New
York last week.
"Amazon is buying that (consumer retail) business. Other
players are buying that business. So it's a war."
Kravetz, whose first job after earning an MBA in 1995 was at
CML Group Inc, a company that sold NordicTrack exercise machines
and other products through catalogs and television
advertisements, said "the old joke was that we gave away stuff
for free to sell people shipping."
The game has changed for retail players now, he said.
"They have almost no gross margin and they're giving away
shipping. It's a tough gig. But if you're Amazon - and you're
playing the long game - if you can only get another trillion
dollars' worth of revenue and then raise prices one percent the
numbers can work."
More retailers face pressure to cut into their margins or
sacrifice growth, creating a catch-22 for investors even as
consumers seem poised to open up their wallets for the sales
that follow Thursday's U.S. Thanksgiving Day holiday. About 38
percent of American consumers planned to shop on "Black Friday,"
a Reuters/Ipsos poll showed last week.
Even so, money managers are getting more selective.
Eaton Vance Corp portfolio manager Kathleen Gaffney, whose
Multisector Income Fund holds bonds issued by J.C.
Penney Co Inc and Nordstrom Inc, said she has
scaled back the J.C. Penney holding.
"They've pretty much secured every asset that they have so
it is going to be challenging. Nordstrom, on the other hand, is
well suited for the current market," Gaffney said at the Reuters
summit, adding that the company's managers have been effective
and target a solid, upscale niche.
Nordstrom shares have added 10 percent this year, including
dividends, sharply paring gains closer to 50 percent earlier
this year after reporting disappointing third-quarter same-store
sales. J.C. Penney shares crashed nearly 60 percent
over the same period as the company continued to struggle to
appeal to changing tastes of younger shoppers less likely to
frequent traditional department stores.
Katie Shaw, sector leader for the global consumer team at
Fidelity Investments, said she is positive about retail stocks
because U.S. consumers are getting a raise, seeing
inflation-adjusted wages gain at all income levels for the first
time since the 2007-2009 global financial crisis. But Shaw has a
lower holding in mall-based department stores and big-box
retailers than the benchmark against which she is measured.
"The role of retail to a customer's life has changed," she
said. "There are a number of companies who have yet to invest in
driving emotional connection with consumers."
(Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and
First Published: 2018-11-21 20:08:59
Updated 2018-11-21 21:58:13
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