Despite the doom-and-gloom predictions about the future of big-box retail that are dominating headlines lately, some analysts are bullish about select real estate opportunities and those brick-and-mortar retailers with high customer-satisfaction and engagement ratings in the coming year.
"The death of retail has been exaggerated," said Jay Rollins, managing principal of JCR Capital, which invests in value-add, "urban infill" and neighborhood retail center real estate for short-term returns of 15 percent to 20 percent.
"Neighborhood retail is convenient to everyone's daily life; you're going to a dry cleaner, a liquor store and a nail salon, [and] maybe a restaurant," Rollins said, noting that these types of business are integrated into people's lives for their daily needs.
"It's about the three- to five-mile concentric circle around a neighborhood; it's convenience retail versus destination," he added. "Can you push a button, and have a drone drop you a bottle of Jack Daniels in 10 minutes? That would be a game changer."
Retail — even brick-and-mortar retail — would be difficult to sink altogether. The industry directly provides 29 million jobs and contributes more than $1 billion annually to U.S. gross domestic product — mostly due to smaller businesses, according to a study by PricewaterhouseCoopers for the National Retail Federation. About 95 percent of retailers operate just one location and almost 99 percent of retail businesses employ fewer than 50 people. Consumer spending accounts for about 60 percent of the U.S. economy, according to financial analysis firm Sageworks.
While retail sales growth is down to about 3.8 percent in 2017, compared to 6.7 percent in 2013, net profit margins have risen to 3.3 percent, up from 2.3 percent, Sageworks reports.
The shopping habits of millennials — born between 1980 and 2000 and now the largest generation — are driving many retail trends. About 82 percent of millennials said they actually prefer brick-and-mortar shopping, consulting firm Accenture found. In Accenture's survey of retail industry leaders, about 40 percent of respondents said they are most concerned about millennials' lack of loyalty.
However, the consulting firm found that millennials are, in fact, exceptionally loyal when they are happy. More than 95 percent of millennials said they want the brands they like to actively court them and that they seek out personalized promotions and loyalty programs.
That's why in just over 18 percent of consumer discretionary holdings, ACSI Funds' American Customer Satisfaction Core Alpha ETF is made up of retail companies that pass a series of customer satisfaction metrics to determine how likely a company's customers are to remain loyal, as determined by its underlying index. Among the fund's holdings are Amazon, Dollar Tree, Costco and L Brands.
"It's no secret that there is some contraction in the retail space," said Phil Bak, CEO of ACSI Funds. "We don't think retail is going to evaporate altogether."
For his part, certified financial planner Mark Painter, founder of EverGuide Financial Group, says there's value in many areas but picking winners and losers is difficult. "Remember when Ron Johnson took over at JCP in November 2011 and the stock instantly went from $30 to $43 a share in the span of three months on the promise of brand change and strategy?" Painter asked. "Two CEOs later and a stock price near $3, it is still trying to right the ship."
Because of such low prices of some retail stocks, investors should be weary of "value traps," said Daniel Lugasi, portfolio manager at VL Capital Management. "We believe the most insulated retail companies are those that offer a differentiated service than a company such as Amazon, can provide," he noted, pointing to TJ Maxx /HomeGoods and Ross as prime examples of "differentiated" shopping experiences because they offer discounted products curated for shoppers. TJ Maxx trades at a P/E of 19x because it is a well-run retailer, Lugasi noted, adding that "value traps, such as Macy's, are trading at a P/E of 9x earnings, but the business is in decline" by other indicators.