Trader Talk

Retail is facing a historic moment of truth

Key Points
  • Retail has reached a tipping point, and it's looking like an uphill battle from here.
  • Amazon is getting incremental new business and taking share from everyone else.
  • You combine rising inventories with traffic declines, and you have a big problem.
Women try on shoes at a J.C. Penney store at the Gateway Shopping Center in the Brooklyn borough of New York.
Michael Nagle | Bloomberg | Getty Images

Analysts are not known for making bombastic comments, but this remark from Piper Jaffray Retail analyst Erinn E Murphy certainly has the ring of truth: "Q1 2017 Likely Marks A Historic Moment For North American Softlines."

A historic moment of truth? That's not too hyperbolic. Piper Jaffray believes Amazon "will have driven >100% of industry growth in Q1 by the time everything is tallied."

How is that even possible? Because Amazon is getting all of the incremental new business, and it's taking share away from everyone else. Even discounters may be showing cracks now.

It's not like the consumer isn't buying. I noted in my last post that retail sales grew better than 3 percent in 2016. But the shift in where they are buying is accelerating and has likely reached a tipping point.

April retail sales show that the trend toward online is very much intact, and the department stores continue to lose sales:

April Retail Sales

Dept. stores: down 3.7 percent
Online: up 11.9 percent
Restaurant/bars: up 3.9 percent
Furniture: up 3.8 percent

Notice that the trend toward going out to eat and drink is very much intact, as is furniture sales. No wonder Amazon is looking to expand into furniture.

J.C. Penney's CEO sounded the same note as Kohl's, saying: "We are pleased with our comp store sales for the combined March and April period, which improved significantly versus February."

He too reaffirmed full year earnings guidance for JCP at $0.40-$0.65. Never mind that's a pretty wide estimate: no one believes it anymore. Not with same store sales trends like these:

Retail same store sales

J.C. Penney: down 3.5 percent
Macy's: down 4.6 percent
Kohl's: down 2.7 percent
Nordstrom: down 0.8 percent

You combine rising inventories with traffic declines, and you have a big problem. Analysts have been cutting JCP yearly estimates for months, but it will likely be cut even more in the coming weeks:

J.C. Penney:
(Full-year estimates)

January 1: $0.66
Today: $0.48

Here's something a bit alarming: Even the discount stores are struggling. Much was made about the fact that Nordstrom Full-line store sales were down 2.8 percent and that the off-price Nordstrom Rack saw sales rise 2.3 percent.

But Nordstrom breaks down store figures and e-commerce figures separately for its full-priced store line and its discount Nordstrom rack line.

Look at sales for Nordstrom Rack:

Nordstrom Rack
(Same-store sales) up 19.1 percent
Rack stores: down 0.9 percent

Sales in Nordstrom Rack stores were DOWN year-over-year, even though e-commerce was strong. This doesn't bode well for other discounters out there. Saks Off-Fifth discount store also delivered a same-store decline of 6.8 percent. Keep a close eye on TJX, which reports next Tuesday, and Ross Stores, reporting Thursday.

The point: there may be an overall sales decline occurring in the stores, not just department stores.

The range of "winners" is thus narrowing. Yes, you have the DIY crowd still buying (Sherwin Williams, Home Depot, Lowe's), because those are natural products to buy in-store, but the twin juggernauts of Wal-Mart and Amazon keep garnering market share.

If you're looking for a way to play the online retail revolution, it's not easy. There is an ETF, the Amplify Online Retail ETF (IBUY), which owns 40 companies that have 70% or more of revenue from online or virtual sales. It's gained 22% year-to-date, as opposed to the SPDR Retail ETF (XRT), a basket of 103 retailers, which has lost 4% this year. IBUY's biggest holdings include PetMed, Carvana, Etsy, TripAdvisor, Netflix, Paypal, and eBay.

Its biggest problem? A tiny, $25 million market cap.