Black Friday Losers

Is that it? Is it just “game over” for brick-and-mortar retail stores? Well, if you go by Back Friday numbers, then yeah, traditional retail is down for the count. 

Reuters reports that combined net sales revenue for Thursday (Thanksgiving) and Black Friday was down 5% from last year. And Black Friday sales were down a crushing 10.4%.  

Shelley Kohan, vice president of retail consulting at RetailNext, told Reuters: “We knew it (holiday season) was going to be off to a slow start… the first couple of weeks with the election were a complete distracter from the normal course of business and… a warmer climate in November may have made the sales more stubborn.”

Now, I don’t know what a “distracter” is. It sounds like a made-up word. And I think the rest of that excuse-laden sentence is as good as made up, too. First of all, the election is over. And it sure hasn’t been a “distracter” for people who buy stocks. All indices have jumped to record levels over the last week. Some stocks, like my Wealth Advisory holding Bank of America (we’re currently up 143%), are sitting at multi-year highs.  

And if a warm November hurt retail sales at stores, why didn’t it put a dent in online shopping? 

Online sales for both Thursday and Friday hit $5.27 billion, up 18% over last year. Black Friday online sales alone jumped 21% to $3.34 billion. Why Citigroup (NYSE: C) would downgrade online giant Amazon (NASDAQ: AMZN) in the face of such huge numbers is beyond me. But Citi has made it a habit to do things bass-ackwards…

There’s a good reason why Citi stock is up only around 10% since the election, while Bank of America is up over 20%. That’s because BofA is very well positioned for rising interest rates. A full one-point rise in interest rates would push interest income up by $5 billion at Bank of America. The same rise would help Citi’s interest income by just $2.7 billion. That’s right, there is a big reason I recommended BofA to my Wealth Advisory readers instead of Citi. But I digress…

Is There ANY Hope for Retail? 

Now, here’s the thing about those retail numbers: they should be getting better. Unemployment is at a nine-year low, and hourly wages just showed their biggest gain since 2009.

(Sorry, I have to digress again: Wage inflation is the metric the Fed watches most closely, because it’s the one with the most direct influence on overall price inflation. It’s pretty much a lock that the Fed will hike rates another quarter-point in December. And there will likely be at least two more coming in 2017. So, yeah, Bank of America…)

Analysts are guessing that total holiday sales will rise 3% to $636 billion this year. That’s decent. But don’t forget that in the case of retail sales, estimates really are just guesses. It’s no different than a weather forecast for a month from now: sure, if nothing changes in a month, the weather will be a lot like it is today. But the one thing we know is that things change.

Of course, we may lament that change. Personally, I don’t like the thought that it will probably be a lot colder a month from now. 

And we may not even understand the change. Again, on a personal note, I don’t really like shopping online. I usually don’t know what I want to buy until I see it, and when I see it, I want to touch it or try it on before I buy it. I have never surfed around the Amazon website just looking for stuff to buy. 

Judging by the numbers, I have to guess that plenty of people do spend time at Amazon.com just looking for stuff to buy. But that doesn’t mean I understand it. I guess you really can’t teach an old dog new tricks. Now you kids get off my lawn!

Now, for old grumps like me, let me just say, despite the crushing power of online companies like Amazon, there actually is hope for traditional brick-and-mortar retailers. Here’s why…

The More Things Change, the More a Good Online Strategy Matters

To compete with Amazon, traditional retailers hit on the idea of letting consumers order stuff online and then pick it up in stores. Again, I’m not sure I understand why people want this. Seems to me you’re just spending additional money on gas and not getting the movies from Amazon Prime. But don’t forget: old dog, stay off my lawn. 

Anyway, Target says that 33% of people who do the whole “order online, pick up in stores, don’t watch Amazon Prime movies” will buy more stuff once they come into the store. That’s probably a meaningful metric. And maybe that’s why Amazon is opening actual stores.

Actually, it’s reported that Amazon wants to open grocery stores. Why? Well, as one article puts it: “Why is Amazon opening brick-and-mortar grocery stores? Because it wants to dominate groceries online.”

Amazon plans to offer perishables in-store, with pick-up or delivery options for other stuff. I guess that makes sense. Open stores so you can dominate online…

One thing seems certain: companies think the “in-store pick-up” thing is a workable idea. And believe it or not, the management team at J.C. Penney (NYSE: JCP) pioneered the pick-up-in-store strategy. They are pretty good at it, too.

For the most part, I am avoiding any investments in retail. I have a hard time valuing Amazon. And I think the Targets and the Macys of the world have some downsizing of their locations coming before they are attractive as investments. But at $9 and change, picking up a few shares of J.C. Penney looks like a pretty good idea to me. 

The company has already been forced to downsize, thanks to the failed CEO Ron Johnson. And JCP is recovering market share very quickly. It will be slightly profitable this year, but it is expected to earn $0.67 a share in 2017. That’s a pretty good turnaround. There’s a good chance JCP sees $11 in the next couple of months.

Until next time,

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.