Are retail stocks set to regain their mojo in 2021?

Retailers in the United States, especially those from the brick and mortar segment, witnessed a tough 2020, laden with massive losses, job cuts, and a plunge in consumer spending. Businesses were either forced to shut shops or file for bankruptcies. According to S&P Global, there were more than three dozen retail bankruptcies in 2020 — a 11-year high, while Coresight Research pegs retail store closures at more than 8,400.

The numbers do underscore the deep pain endured by traditional retailers, and stocks in the sector plunged during the initial coronavirus shock in March-April. But some companies were quick to pivot towards an online push and focus on essential services that helped them survive the pandemic.

And, with rollouts of vaccines, investors are hoping that the economy would potentially return to normalcy and help such companies narrow the gap with those who raced ahead during the pandemic. This brings forward the question: Will traditional retailers reclaim their mojo in 2021?

Looking at the chart below — marquee names in the retail segment such as Target Corp (TGT), Costco (COST), Walmart (WMT), and Best Buy (BBY), among others, saw their stocks drop around March and April of 2020, but a bigger push towards digital adoption, beefing up supply chains, renewed focus on essential goods and commodities and introducing tweaks such as curb side pick-ups have helped their business recover from the coronavirus shock.

Performance of Top Retail Stocks in 2020

Even the SPDR S&P Retail ETF (XRT), which tracks retailers such as department and specialty stores was up nearly 40% in 2020, as per this report. That vastly underperforms the significant jump in shares of online companies such as Etsy (ETSY), Amazon.com (AMZN), and Wayfair (W), among others.

Investors now hope that with successful emergency-use grants for some coronavirus vaccines, among over a hundred under development, economic activity could rebound and boost footfalls at traditional retail outlets, boosting their sales and profits. A few of the other positive factors for the retail sector are:

• Cashing in:  Customers have been sitting on cash owing to reduced spends throughout the pandemic year. Post-pandemic discretionary expenditure could receive a boost in this year, experts say. As per data from Morgan Stanley, consumers saved about 13% of their incomes in October 2020. While that is lower than 20% seen during summer of that year but was still well above the long-term average of 7%. RBC Capital estimates consumer savings of about $2.2 trillion, equal to about 10% of the U.S. GDP.
   
• Higher traffic: While the virus’ spread continues, footfalls in retail outlets rose on festive and holiday weekends. Investors are pinning hopes on this trend to accelerate with a widespread rollout of vaccines. Ten major retailers, including Walmart, Macy’s (M), and Dollar General (DG) increased by an average of 18% on Super Saturday weekend or the weekend before Christmas, compared with the Black Friday weekend, industry tracker Placer.ai showed.
   
• Structural changes: Retailers moved towards a dual in-store and online model during the pandemic. The changes in design, boosting fleet, smoothening of supply chain, expansion of delivery options such as curbside pickup or home deliveries, and contactless payments are likely to woo more business to retailers.  
   
• Adding checks to cart: The U.S. government has also been seeking to push businesses and Americans to spend more for boosting its economy. Apart from trillions of dollars of stimulus, lawmakers recently passed a new $900 billion stimulus deal along with stimulus checks of around $600. President Donald Trump has sought to increase the amount to $2,000 as well. The financial assistance to businesses and citizens is likely to bring in more shopping by customers as well.
   
• Criticality of physical stores: Amid an online shopping boom, retailers are hoping shoppers step out after months of confinement in their homes. Costco is, in fact, doubling down on its physical presence while investing in the e-commerce business as well. Its CEO Craig Jelinek told CNBC that shop-in-store ‘remains an essential ingredient.’ “I still think brick-and-mortar is not going to go away. We want to continue to get people in the stores,” he said, referring to customers who like the physical shopping experience.

Proceed to Checkout?

Quick vaccine approvals have raised hopes for retailers to look past a forgetful 2020. But several market voices also caution investors about the near-term risks for such stocks as coronavirus infections continue to surge in the country while vaccination campaigns go on at a slow pace.  

“The fundamentals are going to be much better in the second half of 2021 and 2022,” Alex Ely, chief investment officer of Macquarie Investment Management’s small and mid-cap growth equity team told Reuters. “But you want to buy six to nine months ahead of when things are great.”