Online Competition & High Inventory Lead To Cautious Outlook For Retail Stocks

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Last year was a tough one for retail overall, and the first round of Q1 reports for 2016 haven’t offered much solace.

As retail’s challenges appear to be mounting, Cowen and Co. analyst Oliver Chen released a report today that detailed several reasons investors may want to reduce their retail portfolio exposure. Among them: excess inventory, increased e-commerce pressures (particularly from Amazon), rising interest rates, skittish consumers and election-year anxiety.

In Q1, department stores — Macy’s Inc. and Nordstrom Inc., to name a few — produced disappointing results as changing consumer habits continued to wreak havoc on traditional retail.

Each of [the] department stores [in our coverage area*] comped negative in 1Q, led by Macy’s” — comps were down 6.1 percent — “while off-price comps outperformed with TJX up 7 percent and Ross up 2 percent, despite fashion execution in ladies,” Chen said. “We believe traffic declines at department stores will likely lead to further store rationalization over time, while conversely positive traffic [and blow-out comps] at off-price, support the case for square foot growth to higher saturation levels.”

Weather, Chen noted, also returned in Q1 to reprise its role as retail’s antagonist. After a warm winter clobbered sales for seasonal apparel and boots, footwear and apparel firms had set their hopes on a better spring. But shifty weather patterns have once again created hurdles.

Case in point: Shoe Carnival Inc. said last week during its Q1 earnings report that warm temperatures helped drive sales early in Q1, while cold weather impacted the its Easter holiday performance.

Since spring floorsets are typically set in early March, apparel retailers need the weather catalyst of seasonable weather to get consumers into their stores and buying shorts, tees, etc.,” Chen noted.

Despite its current challenges, retail does have its bright sports, Chen pointed out.

Strength in the off-price channel and at nonapparel companies are a source of optimism, the analyst said.

*Cowen and Co. covers the following department stores: Ross Stores Inc., The TJX Companies Inc., Macy’s Inc., Nordstrom Inc., Hudson’s Bay Co., Gap Inc., J.C. Penney Co. Inc. and Kohl’s Corp.