Trends

Watch the Gap: Retail’s Winners and Losers

Michael Dick
Senior Equity Trader and Consumer Sector Specialist
January 27, 2021

We knew that the 2020 holiday shopping season was going to be different than any we had ever seen before. With the surge in coronavirus cases, continued high unemployment, and the lack of new government stimulus since the spring, it was unclear if consumers would show up in force as they usually do. Retailers, in turn, tossed out the old Black Friday/Cyber Monday playbook and started pushing holiday sales as early as October, raising questions about how the change might affect critical year-end revenue figures.

For all that uncertainty, the 2020 holiday shopping season turned out to be better than some of the more downbeat expectations. Holiday retail sales rose 8.3% over 2019’s figures, according to the National Retail Federation, which was well above the group’s projected increase of 3.6%-5.2%.

These figures are a testament to the resilience of U.S. consumers and their appetite to spend even in the face of economic challenges. But when we look deeper into the numbers, it’s clear that not all retailers are benefiting equally in the current environment. Not surprisingly, online shopping ruled the season, with e-commerce sales up more than 20% year-over-year. Equally unsurprising, sales at traditional department stores declined roughly 20%.

There’s a clear and widening gap between retail’s winners and losers. Winners tend to be well-financed companies with strong, integrated omni-channel strategies. Think Nike and Walmart, and perhaps less obviously, specialty retailers like Lululemon Athletica. Losers tend to be traditional brick-and-mortar and smaller specialty retailers that still haven’t figured out how to integrate a seamless omni-channel strategy.

Given the strength that these winners gained in late 2020, I think we can expect to see the trend continuing in 2021: The winners will be on offense, while the losers continue to play catch-up.

Investing in digital dominance

The shift to online sales and away from traditional channels like department stores was already happening before 2020. The pandemic simply accelerated that trend and delivered big benefits to retailers already in a good digital position.

As a result, I expect 2020’s winners to continue investing in their digital operations. In particular, I think we’ll see them continue to favor smaller, smarter acquisitions or partnerships rather than going for blockbuster deals. We saw a lot of this activity in 2020 as retail brands struck deals with companies in complementary categories. For example:

  • Target partnered with Ulta Beauty for a “shop-in-shop” concept.
  • Kohl’s struck a similar deal with beauty company Sephora.
  • Fitness apparel company Lululemon Athletica acquired Mirror, the maker of interactive workout equipment.

Partnering in this way can help strong brands drive more traffic to their retail stores or websites. That new traffic also can provide important insights into their target consumer’s behavior, which allows companies to further refine their digital strategies.

Beyond digital investments, I expect to see winners from 2020 finding other ways to strengthen their leadership positions. For example, companies whose earnings benefited from increased demand during the pandemic (such as dollar stores and big box retailers) simply have more money available in 2021 to invest back into the business, pay down debt, etc.

Meanwhile, retailers that struggled in 2020 may not have the capital to make the same kind of online investments or to improve their balance sheets. I wouldn’t be surprised if we see these companies continue to play defense, resorting to more store closings even though that strategy hasn’t necessarily led to strong improvements in their position.

The challenge of investor expectations

If there’s a potential concern for the strong retailers (and for investors looking at the retail sector), it’s how companies will manage expectations around quarterly sales figures. It may be challenging to lap 2020’s strong gains, and investors could overreact to companies that show decelerating or only maintained momentum. Likewise, if companies aren’t smart with their capital in 2021, we might see expensive stocks experiencing some multiple contraction and especially given current elevated levels.

Investors should also keep an eye on how retailers pivot to what we hope is a post-COVID world later in 2021. One benefit of the supply chain disruptions we saw in 2020 was that the retail sector entered the holiday season with less inventory than usual—and therefore less need to rely on deep discounts and promotions to move product. That helped support margins for some companies. If these retailers learn lessons from the pandemic that lead to better inventory management, it could help them finish this year in a stronger position than they found themselves at the end of 2020.

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