Retail is everywhere. From discount stores to upscale clothing manufacturers, new stores open all the time, but the industry is also changing all the time and that impacts share prices. Make sure you understand the pros and cons of investing in retail stocks before you add one to your portfolio.
Pros and Cons of Retail Stocks
Retail as an industry is impacted by the economy. In a recession or economic downturn, people have less money to spend. In a booming economy, people might spend more on discretionary purchases like cellphones or cars than clothing.
To complicate matters, it might not be just the local economy. With the advent of online shopping, the world is your mall and some domestic brands may have strong sales in another country.
Then, there is regulation and legislation, such as minimum wage, to consider as well as channel disruption, like a labor strike in the manufacturing, shipping, or distribution of products.
It all adds up.
That said, retail companies do have the potential to produce strong returns when everything lines up just right. Plus, retail is a seasonal business, so profits can vary wildly between quarters and then there is the less tangible to consider.
Customer service comes into play as well as the strength of the brand’s identity and social media presence.
The successful store or brand needs to forecast trends accurately, not invest too much capital in chasing the market, charge the right price, and deliver a quality product so that returns are minimized.
It’s a tall order that isn’t so different than hitting a jackpot on a slot machine, and like those sudden winnings, they may not repeat reliably, frequently, or year-to-year.
Is Nordstrom Stock Worth Buying?
Nordstrom (NYSE: JWN) is keeping its focus on inventory.
The retail chain has integrated its online ordering with its store inventory and vendors so that shoppers can place an order online or in-store and have the item(s) delivered from any of Nordstrom’s locations. This includes stores as well as fulfillment centers and vendors.
It is also focusing on the shopping experience itself.
Nordstrom recently bought MessageYes, a company that uses artificial intelligence to deliver highly-targeted notifications to customers while they shop online and allows them to purchase the advertised item with a simple “Yes” response.
“The retail environment is changing faster than ever,” says Brian Gill, senior vice president of technology at Nordstrom. “We need to invest in technologies that will enable us to deliver on those qualities and better serve customers in a digitally-connected world.”
The retail chain is making the shopping experience more social as well.
In early 2018, Nordstrom bought social platform BevyUp. The service connects shoppers, so they can message text and images anonymously to fellow shoppers, getting feedback or sharing a great find. Gill explains, “The expectation nowadays is that you can have that conversation anytime, anywhere, anyplace.”
It’s a unique approach and one that is winning Nordstrom increased sales. The company has been steadily improving net sales for the past five years.
Is Macy’s Stock Worth Buying?
Macy’s (NYSE: M) has been going through some important changes. In October 2018, it added David Abney, the CEO of UPS (NYSE: UPS), to its board and that is just the most recent change. The department store chain has been diversifying its product offerings and focusing on developing omnichannel sales.
“The company has undertaken initiatives – Macy’s Backstage off-price business, the launch of Star Rewards program, Growth50 stores, and expansion of Bluemercury – to keep itself on a growth trajectory,” explains Zack’s. “The company had also introduced various innovative services including Apple Pay, Same Day Delivery, Enhanced Shopping Apps, Innovation in Stores Selling Technology, Macy’s Image Search and Macy’s Wallet/Bloomingdale’s Wallet.”
In addition, it also has a free store pickup feature that has been increasingly popular, and the retail giant now offers Mobile Checkout, a feature on the store smartphone app that lets users scan merchandise and pay for it form the app.
Macy’s has also been investing in businesses to stay ahead of the curve and get the technology it needs to move forward, in both omnichannel sales and in its efforts to build foot traffic in its stores.
In May 2018, the company announced the acquisition of STORY, a retail model that explains products in a magazine-type format.
Macy’s also put money in b8ta, a startup that is focusing on retail as a business.
“Macy’s is in the experience business,” says company president Hal Lawton. “We’re always looking for new formats that allow our customers to discover and connect with our products and services in-store in a way that drives engagement with our brand.”
The new b8ta is a big step in pushing for a revitalization of the brand.
However, Macy’s has a way to go. The company has not been able to meaningfully grow its revenue in the past few years and that is worrying. While its recent investments will help, they also come with debt and the strategy might not pay off in the end.
Nordstrom Vs Macy’s Stock Summary
One potential issue that both Nordstrom and Macy’s face is Amazon (NYSE: AMZN).
According to Nomura Instinet, the online megaretailer carries more merchandise than Macy’s. While the firm is quick to add that the number of products listed for sale is not equivalent or even predictive of a company’s revenue, it does point to a potential threat on the horizon.
The challenge for both Nordstrom and Macy’s will be how to improve on apparel while fending off the likes of Amazon.
Both are trying to diversify themselves and add value to their product offering. Right now, Nordstrom seems to be the one succeeding based on net sales – but that isn’t everything. It is also priced at 16 times its future earnings. In contrast, Macy’s is trading at 8.8 times its future earnings, suggesting it could be undervalued if its strategies pay off.