Can Retail's Rally Hold Up In Next Week's Wave Of Reports?

What has been causing this rally in the retail space? Is it more consumer spending? Is it due to realized undervaluation? Or maybe it is being generated by positive sentiment towards brick-and-mortar retails adapting an ecommerce strategy?

The answer is all the above. The retail space has been beaten down for the past 5 years as the 'retail apocalypse' and global economic concerns take center stage. Online retailers are king in the digitalizing economy, while brick-and-mortar stores see substantial slowdowns. This has been hitting some of retail's most prominent names where it hurts, their bottom-line.

The sector is now being slowly bought up with value opportunities at seemingly every corner of the space. Retailers across the industry are also gradually adopting the online approach, with an increasing number of firms growing their business from a digitalized direct-to-consumer model.

Recent Activity

Walmart (NYSE:WMT) just released its Q3 earnings before the bell on Thursday (November 14th), beating EPS estimates but falling short of revenue expectations. Guidance for Q4 was raised for a second time as holiday expectations progressively grow. WMT traded up 3% on open Thursday morning but has since tracked down.

Walmart illustrated 41% online sales growth as this segment represents a growing percentage of sales. This is becoming an essential segment for growth in most retailers who are striving to remain relevant.

Consumer spending is still here, with October retail sales figures beating expectations. The first 10 months of 2019 saw 3.1% growth from the same period last year, but where is this spending headed if brick-and-mortar retailers continue to be forced to close their doors?

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Online shopping is driving this growth, which illustrated over 14% year-over-year appreciation in October. This trend is only going to continue with over 40% of consumers planning on doing their holiday shopping online, according to a WSJ article.

There is still a subset of retailers who have been able to expand their brick-and-mortar presence and have experienced steady foot traffic.

Discount Retailers

Millennials are the largest consuming group in the US today, and they are driving the trends that have upended quite a few storefronts. This generation embraces convenience and value, and online retail generally fulfills both of those prerequisites, but in-store shopping remains strong at discount retailers.

Discount retailers provide a unique product offering that Millennials seem to enjoy. They provide consumers with the opportunity to hunt for value. This generation loves the satisfaction that comes when you find something you love in a room of discounted goods.

TJ Maxx, Ross Stores, and Target have all benefited from this trend, and so have their investors. These stocks are all up over 30% for the year, with TGT being up over 70%, demonstrating a performance that outpaces both the sector and the broader market.

Take Away

Retailers' performance over the last 2.5 months is a sign of positive market sentiment reentering the space. This sentiment will be tested next week when a wave of retail results hits the market.

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