Daily Management Review

Investors Fear Increased Spending By Retailers Will Dent Earnings This Holiday Season


While a strong and well performing US economy would otherwise have been a cause to rejoicing for investors, it is not so this holiday season. It is being feared hat investors would have very little left as profits to be distributed because of the intense competition between retailers which demand that the retailers spend large amounts of money for draw customers.
While high discount rates are expected in the holiday shopping season, the price way is apparently too fierce this year as retails fight it out to draw in more customers and gain a larger share of the holiday season market. The likes of Amazon.com Inc and Target Corp have made the e-retailing environment more competitive by offering free shipping even for small purchases.
This year investors are fearful that return on their investments on retailers would get marginalised because of tariffs on imported goods, fickle consumer tastes and competition, and the apprehension has been compounded by not so overwhelming quarterly earnings reports this week from Target to department store Kohl’s Corp and home-improvement firm Lowe’s Cos Inc.  
The announcement by Target that the drop in profit margins was because of increased investments into further expanding the online sale channel, wage increases, price cuts and the increased expenditure for preparing and shipping orders was its shares dropping by 10 per cent on Tuesday
“The retailers and e-commerce players are duking it out,” Shawn Kravetz, Esplanade Capital LLC’s chief investment officer, said at the Reuters Global Investment 2019 Outlook Summit in New York last week.
“Amazon is buying that (consumer retail) business. Other players are buying that business. So it’s a war.”
“The old joke was that we gave away stuff for free to sell people shipping,” said Kravetz.
He added that the game has changed for retail players now.
“They have almost no gross margin and they’re giving away shipping. It’s a tough gig. But if you’re Amazon - and you’re playing the long game - if you can only get another trillion dollars’ worth of revenue and then raise prices one percent the numbers can work.”
There is increased pressure on retailers to either compromise of profit margins or on growth which leaves the investors in a catch-22 situation even though it appears that the consumers are ready and willing to splurge on shopping for the beginning of the US holiday season to start after Thursday  - the U.S. Thanksgiving Day holiday. According to a Reuters/Ipsos poll last week, their intention to shop on “Black Friday” was expressed by about 38 per cent of American shoppers.
Despite this, money managers are getting more selective.
“They’ve pretty much secured every asset that they have so it is going to be challenging. Nordstrom, on the other hand, is well suited for the current market,” Gaffney said at the Reuters summit. He added that by targeting a solid, upscale niche, the company’s managers have been effective.