Analysts remain bullish for the retail sector in 2019

Retail is crucial to the overall economic health of Arkansas and the rest of the world as the intersection of consumer spending and trade/manufacturing. On the heels of stellar holiday sales rising 5%, analysts expect retailers will see good momentum to start 2019.

Moody’s Investor Services said recently, “the U.S. retail sector has turned bullish thanks to a robust U.S. economy that should fuel the sector through 2019.” Moody’s said the overall sector should be more stable in 2019 benefiting from “a store rationalization process that began in earnest about three years ago.”

Moody’s expects retail industry operating income to grow between 5% and 6% this year with revenue growth equal to or better than 2018 levels. Walmart is expected to see solid earnings growth in its fiscal 2019 which ends Jan. 31.

Ben Bienvenue, analyst with Stephens Inc., predicts fiscal 2019 earnings for Walmart of $4.86 per share, up 10.2% from a year ago. Topline revenue is expected at $513.3 billion, up 2.6% year-over-year. He expects Walmart to grow sales 3.2% to $530 billion over the next year.

Dillard’s, the other Arkansas-based retailer, is holding its own in the troubled department store category. Analysts who follow Dillard’s expect fiscal 2019 earnings growth of 21% with net profits of $5.81 per share. Sales revenue is expected to grow by 1.3% to $6.5 billion. Dillard’s fiscal 2019 ends March 31. In fiscal 2020, analysts expect slightly tempered earnings of $5.60 per share with revenue growth at 0.6%. Analysts said Dillard’s is outperforming a number of its peers, but it’s underperforming Nordstrom’s and Kohls.

The IBM 2019 Retail Forecast also paints a positive outlook for the sector expecting retailers to see sales revenue growth of 3.4% from a year ago. Not all retail categories are expected to grow evenly, but the report said apparel sales, particularly, children and adult clothing are poised to do well in 2019. IBM Fellow Dr. Mike Haydock noted in the report that pharmacies could see 4.05% growth in 2019 behind a 3.52% increase in health and personal care sales. IBM also expects restaurant sales to grow 5.23% this year.

Deborah Weinswig, founder of Coresight Research, said while e-commerce continues to nibble away at brick-and-mortar retail, there is also a resurgence in physical stores underway as retailers are looking to drive unique shopping experiences. She said the grocery sector will likely remain hot in 2019 as more e-commerce companies move into the adjacent prepared meal space.

Walmart and Kroger recently began testing grocery delivery by autonomous vehicles. And Amazon is expanding its Go Shops while Sam’s Club is testing its own version of Amazon Go in Dallas, Texas.

“We expect retail to evolve in fits and starts in 2019. While not all retailers will enjoy the same level of success, we expect the industry to continue to surprise and entertain,” Weinswig said.

RISKS TO THE SECTOR
Veteran retail analyst Walter Loeb also recently shared his forecast for the retail sector which was not as rosy as others predicted. Loeb is a retired senior retail analyst from Morgan Stanley and now leads Loeb & Associates a retail analytics and consultancy firm.

“When I look at the near future for retailing, I worry. I see disruptive action in Washington that is creating uncertainty in the markets, which could erode consumer confidence and shopping plans,” Loeb said.

He expects there is “consternation among retailers, so they will play it close to the vest with inventory while promoting additional sales to get customers into their stores.”

Loeb and other analysts have said if the U.S. and China don’t iron out their trade issues before March, the 25% tariffs will have an inflationary effect on consumer spending. Weinswig also said tariffs are a threat to profits in the back half of the year if the U.S. and China fail to reach a deal.

Loeb’s sales predictions for the first half of 2019 are 2%, lower than most analysts gave. He said there’s not very much to stimulate consumer interest in discretionary spending by way of new fashion trends or home furnishing fads.

“With traditional operating cost increases, that just won’t cut it. Profits will be down for many retailers in this period,” Loeb predicted.

He expects to see retailers from Macy’s to J.C. Penney focus on sales promotions which over time cut into profits. He said free deliveries of online purchases also cost brick-and-mortar profits and do very little to drive brand loyalty.

Loeb said it’s not all gloom and doom for the retail sector, but the cost of doing business continues to rise with higher minimum wages for workers, investments needed in fulfillment and distribution as well as improved customer service and data management.

With that, Loeb said retailers that invest into better experiences with the help of artificial intelligence, robotics, and blockchain have the best chance to survive long-term. but that likely comes at the expense of shorter-to-medium term profits.
__________________

Editor’s note: This article first appeared in Talk Business & Politics State of the State 2019 magazine, which you can access here.