Terrible retail sales report shows acceleration in fates of struggling and thriving retailers

Market Insider

A shopper wears a protective mask while browsing through the Island Cotton Company store as the state of Florida enters phase one of the plan to reopen the state on May 4, 2020 in Stuart, Florida.

Joe Raedle | Getty Images

A shocking 16.4% plunge in April retail sales signals an even bleaker outlook for some brick and mortar retailers and shows a widening divide between the industry’s winners and losers.

Consumers curtailed spending on nonessentials in April, after states shut down their economies to prevent spread of the coronavirus. Economists had expected a 12.3% decline. Retail sales fell a revised 8.3% in March, but state shutdowns did not start until the second half of the month,and losses were offset by signs that consumers hoarded food and other goods.

“It’s an acceleration of a trend. It speeded up by two to four years the restructuring in retail,” said Diane Swonk, chief economist at Grant Thornton. “This completely shifted what is going to be their business models going forward.”

Swonk said stores will face difficulties reopening with social distancing requirements and some may be forced to experiment with things like pop up outdoor stores.

Sales at nonstore retailers, or online, rose 8.4% in April, but most other things took a big hit except for big box retailers, which appeared to be down less than others, Swonk said. All major categories were lower, including a 13.1% drop in food and beverage stores, which economists had expected to see gain.

Retail stocks were higher in late morning trading, with the SPDR S&P Retail ETF up 0.7% but it was well off its early high.

Many of the retailers report earnings next week, with Walmart, Home Depot,  and Kohl’s Tuesday, and Target and Lowe’s on Wednesday. TJX and Best Buy report Thursday. Amazon bucked the trend of retail stocks and was trading down 1%, in line with other big tech momentum names. 

In the retail sales report, the general merchandise, which includes department stores and big box stores, fell 20.8% but within that number, Swonk said department store sales fell 28.9%, after declining sharply the previous month. Specific data on big box stores, like Costco, Target, and Walmart was not yet available.

“The big box discounters had a huge increase in March, but it looks like they fell [in April] but not as much,” she said. “Shoppers bought ahead and hoarded in March. … The credit card receipts show Target and Walmart held up better.”

The biggest declines were in clothing and accessories, down 78.8% and electronics and appliances, down 60.6%. Furniture was down 58.7%. However, building materials and garden equipment fell just 3.5% as consumers appeared to work on home improvement projects and work in gardens during the shutdowns.

The industry has already seen some high-profile bankruptcies since the shutdown began, and more are expected. J. Crew was the first big name casualty, followed by Neiman Marcus. Some department stores were among Friday’s better performers, like Nordstrom, up 7%, and Macy’s, up more than 3%.

“You’re talking about a group that’s the third worst-performing in the S&P 500, reacting to a ‘sell the rumor, buy the news’ bump,” said Art Hogan, chief market strategist at National Securities. Hogan said the pop in retail stocks was in some ways a reaction to the fact that April’s retail number appeared so poor because of hoarding in March.

“If you look at this retail number this morning, what’s already happened with folks like Neiman Marcus and what’s likely to happen with J.C. Penney … the pandemic has accelerated the major shakeup in the industry. It’s basically expected to happen much quicker,” said Michael  Arone, chief investment strategist at State Street Global Advisors. J.C. Penney has been expected to file bankruptcy, but it did announce Friday it made an interest payment. Its stock, priced at about 26 cents per share, was up 38% on the news.

Citigroup analyst said stores that will do better in the reopening of the economy include big box stores because they tend to be stand-alone, bigger structures with wider aisles, making it easier for social distancing. Companies like Tapestry and Ralph Lauren could also do better, since they have factory outlet stores that are anchored in more open air facilities.

“We’re going to continue to see major disruptions between companies that can thrive online, that can compete on scale and price, and those that can’t,” Arone said.

Arone said Walmart and Target are in the winners category. “Examples like that are solid and those that don’t fit that model are suffering mightily, as the economy enters recession, and they might not survive the shakeup. … As we look at those earnings, we’re going to see stark winners and losers.”

Earnings for the consumer discretionary sector, which includes many retailers, are expected to be down more than 45%, according to Refinitiv. Earnings for the broader S&P 500 are expected to be down about 12% for the first quarter, according to Refinitiv.

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