Retail is one sector that has experienced severe complications amid the COVID-19 pandemic. As people are forced to stay indoors, there are fewer shoppers at brick-and-mortar stores. Further, retail shops are facing supply chain bottlenecks, while e-commerce is flourishing as people are forced to change consumption patterns and shop online.
The entire retail landscape has become complex, to say the least. Demand for some products is shooting up while it is dwindling for many others. Retail outlets catering to apparel, back to school, and accessories are grappling with slowing demand. At the same time home decor, groceries, personal grooming, and others are witnessing increased interest from buyers.
As a result, a lot of retail stores have shut down rendering a lot of people jobless. According to Coresight Research, as of September 4, close to 7,707 retailers shut shop, while 3,344 new stores opened.
Consumer spending in the US likely to be cautiously optimistic
It seems that gradually retailers are opting for selective shopping and learning to live with the new normal. The July numbers were encouraging and suggest that shoppers are driving sales by buying more home appliances, packaged food, and sanitization products.
In July, retail sales in the US jumped 1.2% year-over-year, but the numbers missed expectations and indicated that shoppers are cautiously returning to stores.
Moreover, over a fifth of Americans were living on unemployment benefits doled out by the government, so it isn't their own money that people were spending. As the weekly jobless claims dropped below 1 million for the first time since March, the better-than-expected payroll figures make it unlikely for Congress to renew the unemployment benefits.
Lydia Boussour, senior US Economist, Oxford Economics, said, "The recovery in consumption...will be restrained by income cliffs and renewed virus fear."
Consumer spending accounts for nearly more than two-thirds of the U.S. economy. Hence gauging the direction of retail spending is critical. The conservative retail spending approach could also be one of the key factors behind the bankruptcies of six retailers between July and August. As per S&P Global Market Intelligence analysis, a total of 44 retailers have filed for bankruptcies in 2020.
A strong digital channel and limited exposure to apparel is critical
The retailers who have adapted to the changing times and strengthen their digital channels have survived in current times. For example, Target (NYSE: TGT) has posted a 24% year-over-year growth in same-store sales in Q2 driven by online sales and has managed to outperform the S&P 500 in 2020.
The retailer also offered customers the option to pick up orders as well as provided delivery to their cars during peak lockdown periods. On the other hand, TGX Companies, a discount retailer, posted a loss of $214 million in the second quarter due to the shutdown of many of its stores.
Similarly, Ross Stores (NASDAQ: ROST) saw a 33% YoY drop in sales for Q2, while Burlington (NYSE: BURL) reported a 39% YoY decline in its revenue. Both the retailers have practically no exposure to e-commerce and this has been a major limitation amid the coronavirus crisis.
Even though both these companies had seen tremendous success in the recent past, operating via a brick-and-mortar proved to be a major deterrent. These companies were primarily seeing traffic due to the deep discounts that they were offering.
Investors need to take calculated risks
The retail sector has been devastated in 2020. However, some investors see this as a buying opportunity. Experts believe that retailers with a strong online presence, robust supply chain, and limited exposure to apparels are likely to flourish.
Millennials are likely to be more inclined towards wellness and lifestyle products while strong customer loyalty is also crucial for the retail stocks to survive amid the current phase of uncertainty.
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