https://www.barrons.com/articles/gap-and-8-other-amazon-killers-that-could-thrive-in-2019-51546443729
9 Retail Stocks That Could Thrive in 2019
Jan. 2, 2019 10:42 am ET
Photograph by Xianjuan Hu
Retail stocks made strides last year, but when it comes to 2019, there's plenty to be concerned about.
Where we were: Retail thrived in the first three quarters of 2018, only to suffer, along with the rest of the market, at the end of the year.
Where we're headed: There's reason for optimism about the sector—as well as caution, say analysts.
New year, same old debate: What to do about retail?
2018 was a year of contradictions: The sector reached new highs, enjoyed the benefits of strong consumer confidence and low unemployment, and the holiday shopping season went better than some feared. And yet retail stocks cratered in the fourth quarter, freight costs kept going up at a time when free shipping is becoming more a necessity than a luxury, and wage pressures remain.
Where does that leave us? It depends on whom you ask. Let's start on an upbeat note: Jefferies' Randal Konik says it's time to buy the dip. "The consumer is strong, Amazon isn't killing retail, the Federal Reserve is more dovish, oil down, first-half weather compares easy, free cash flow piling up, margins are moving up and consumer discretionary stocks are cheap on absolute and relative basis," he writes.
Read more: Investors May Be Wary of Retail Stocks in Early 2019
Konik argues that after what he calls a late-year "air pocket," it's a good time to go long on consumer names. Recent fundamentals point to stock-market volatility and tariff uncertainty as the reasons behind a more moderate consumption rate, rather than it being late in the economic cycle. Moreover, the consumer still looks strong, and a more rapidly changing fashion cycle should benefit retailers.
And then there's Amazon.com (AMZN), which, according to Konik, lost share for the first time. "Amazon's grip on apparel is low (especially fashion apparel) while retailers are catching up with delivery and fulfillment capabilities," he writes. "As a result, we believe after a decade of dominance by Amazon consumption trends are likely to splinter." Meanwhile, other platforms are muscling in and gaining consumer followings. "Amazon isn't the only game in town anymore."
That's not to say it's blue skies from here on out—there's the question of tariffs, the Fed's moves, whether or not Chinese tourism recovers, and the cost pressures of wages and freight. Yet Konik thinks that the sector can bounce back.
Wells Fargo's Ike Boruchow is more measured in his outlook. On the bright side, 2018 was certainly an "inflection year for retail," as traffic improved, comparable sales were robust, and inventories were clean. Moreover, he writes that e-commerce "meaningfully underperformed" the bricks-and-mortar retail space in 2018: That's welcome news, not only because it shows cracks in Amazon's armor, but because it helps to put to bed the narrative of a retail apocalypse that was so dominant several years ago.
Yet caution is warranted, warns Boruchow, who argues that post-Black Friday sales slowed "an ominous end to an otherwise successful year," and global worries, from China uncertainty to Brexit, have hurt international brands.
Overall, "2019 is likely to be worse than 2018 for the space—tougher compares, more margin pressure (wages, freight, input costs), continued e-commerce channel shift and lack of broad-based consumer stimulus could weigh on the group's trajectory," he writes. That leaves him waiting for holiday results and initial full-year outlooks from retailers before wading in.
One thing both analysts agree on is that there are still opportunities in individual stocks. Gap (GPS) is Konik's best idea for 2019, while his other top picks include American Eagle Outfitters (AEO), Five Below (FIVE), Foot Locker (FL), Kohl's (KSS), Urban Outfitters (URBN), and Under Armour (UAA). Boruchow likes Foot Locker as well; his other top picks include Tapestry (TPR) and Lululemon Athletica (LULU).
On the first trading day of 2019, of course, it's difficult to say where retail as a whole will end the year. Near-term, it's likely that the stocks will trade in line with the market, especially on headlines about tariffs. Fourth-quarter results will start to roll in toward the end of January, offering the next catalyst.
It's worth remembering, however, that plenty of retailers traded down in early 2018 on fourth-quarter earnings, despite a strong holiday shopping season, only to overcome that downdraft and unseasonably cold first-quarter weather—at least until the recent volatility.
The SPDR S&P Retail ETF (XRT) was down 0.1% in Wednesday morning trading, to $40.95.
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