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Bricks and Mortar Can Still Bring It

23 November 2013 in Trading Ideas

It’s almost like you’re supposed to feel sorry for the traditional retail company.

When you consider this year’s holiday shopping season consists of only 26 days (27 for those of you taking advantage of store openings on Thanksgiving evening), as well as the reality of the surge in online shopping, one could almost get the idea that fewer shoppers will have the opportunity to be walking into stores, no matter how much they try to increase their holiday hour schedule.

Here’s the reality: good old bricks-and-mortar stores still account for 85% of all retail sales.1 And even if this year’s numbers are less than spectacular, projections are still calling for holiday spending to total $738 billion.

And here’s another reality: The line between online shopping and in-store shopping isn’t exactly a sharp one. Even retailers that rely on in-store customers are doing what they can to keep up with how technology has shaped the shopping experience.

“Retailers are learning how to engage shoppers through mobile devices inside and outside the store, which is having a profound impact on customer interaction and store traffic,” said Alison Paul, vice chairman with Deloitte, in a recent think-piece for the Wall Street Journal’s online edition.2 “Consumers using their smartphones are more likely to make a purchase compared with other shoppers in the store, indicating that these activities are contributing to sales and keeping a shopper from turning to a competitor.”

hot retail motifAnd finally, let’s remember another key part of retail: some companies are faring better than others.
That’s a key investment thesis of our Hot Retail motif, which is up 4.9% in the past month, and has gained 33.6% so far in 2013. The S&P 500 has increased 3.6% in the past month and has risen 25.8% so far this year.

The motif aims to separate out retail’s wheat from the chaff, singling out the companies with significant physical presences that are exhibiting same-store sales growth while also avoiding being saddled with relatively high selling expenses and low operating margins.

And while the holiday season is huge for retailers, many of the top names in the sector are able to show success without it.

Take, for example, Home Depot, which has an 11.5% weighting in the Hot Retail motif. Earlier this week, the home improvement store operator posted a 43% rise in profit for its most recent quarter, as rising home prices have spurred homeowners to splurge on renovations.3

Naturally, there’s hardly a guarantee, especially in the fickle and economic-dependent retail sector, that past outperformance can be repeated.

On the other hand, it’s likely understood by many investors that the performance of the best of the brick-and-mortar retail stocks isn’t easily dismissed.

1“Top 100 Retailers” Stores.org Jul 2013 (http://www.stores.org/top-100-retailers)

2Deloitte Insights, “Online Channels to Dominate Holiday Retail Sales,” WSJ.com, Nov. 11, 2013.

3Kevin Orland, “Home Depot Profit Tops Analysts’ Estimates on Housing,” Bloomberg.com, Nov. 19, 2013, http://www.bloomberg.com/news/2013-11-19/home-depot-profit-tops-analysts-estimates-on-housing.html.

Tags: Hot Retail