The Internet Is Tough On Brick & Mortar Retailers

Thursday, May 19th, 2016 @ 5:05PM

Gary D. Halbert

Between the Lines

Following a very disappointing 1Q, consumers boosted spending in April to the highest levels in more than a year, accelerating their turn toward online shopping. This widens the divide between in-store retailers and Internet outlets pitching lower prices and convenience.

The Commerce Department on Friday reported that retail sales rose 1.3% in April from a month earlier when sales actually declined 0.3%, and well above the pre-report consensus. For the last 12 months, retail sales rose 3.0%. For reasons that are not altogether clear, consumers decided to spend more in April, even though the Consumer Confidence Index dipped moderately last month.

Within the latest sales data, the category that includes shopping on Amazon.com Inc. and rival websites and apps grew 2.4% in April. In the past year, Internet and catalog sales have grown more than three times as fast as overall sales, up 10.2%. Department store sales, meanwhile, sank 1.7% over the past 12 months.

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Results from Friday’s retail sales report showed how the shift toward online shopping is knocking down major in-store retailers.  JC Penney, Gap, Macy’s, Kohl’s, Nordstrom, Ross Stores, Fossil and other big names recently reported large declines in sales in the 1Q.

In case you haven’t noticed, many brick & mortar retailers have seen their stocks pummeled in recent weeks, prior to last Friday’s better-than-expected sales report. JC Penney shares are down about 40% in recent weeks, and the retailer admitted it is taking emergency measures, including slashing payrolls and freezing overtime, in light of slower sales this year.

GAP shares were down nearly 20% ahead of Friday’s sales report. Macy’s shares were down over 15%. Kohl’s shares were down over 9%, Nordstrom down over 17% and Fossil shares were down 25% ahead of Friday’s report.

Online retailers like Amazon.com keep gaining market share, eating away at the sales of traditional retailers. Amazon is now the second-largest apparel seller in the US, behind only Wal-Mart. The apparel space has long been dominated by brick & mortar department stores. Not anymore.

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Also prices for certain categories of purchases, such as apparel, aren’t keeping pace with inflation, further pressuring those old-school retailers.

More importantly, surveys have found that Americans are choosing to spend their money differently, placing increasing emphasis on services and experiences over “stuff.” Plus, rising rents and medical costs may be drawing dollars that would otherwise go toward a new outfit or a fresh pair of shoes.

Executives at traditional large retailers struggled to explain the slump, which for some companies was their worst since the recession. Some pointed to a decrease in mall traffic, while others said shoppers were spending more on items their stores don’t sell such as entertainment, travel and food.

“The consumer was simply spending their hard-earned dollars in experiences, entertainment and to beautify their home,” JC Penney Chief Executive Marvin Ellison said Friday after reporting lower-than-expected sales. He said the chain is responding by adding appliances and other home goods to its stores.

For economists, Friday’s sales data offered a glimmer of optimism, no matter where the money was being spent. Consumers remain the primary driver of the US economy, accounting for more than two-thirds of economic output. A spending slowdown in the first three months of the year was partly responsible for GDP growth nearly stalling, climbing at just a 0.5% annual rate.

Economists say April’s spending surge points to faster growth this spring. Forecasting firm Macroeconomic Advisers raised its expectation for 2Q GDP growth to a 2.3% annualized advance, up from 2%. Barclays raised its forecast to 2.2% from 2%. We’ll see.

These forecast upgrades are consistent with the recent significant improvement in the Atlanta Fed’s GDPNow indicator, which attempts to gauge the economy in real time on a weekly basis. The estimate below is for 2Q GDP as of the end of last week.

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The GDPNow reading of 2.5% growth has strengthened significantly since March when it was below 1%. Much of the increase has occurred just so far in May. The model was anticipating last Friday’s stronger than expected retail sales report. Let’s hope this improved forecast holds up!

On the other hand, if the GDPNow reading remains at this level (or improves), this raises the odds of a Fed rate hike at the June 14-15 FOMC meeting.

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