I’m sure I wasn’t the only person in the industry to raise an eyebrow when the S&P Retail Index notched an all-time high last month. Closing at $669.26 on Sept.14 to reach that milestone, the index has continued to creep up even further the last couple of weeks. A closer look at the stock market performance of the retail sector shows that both REITs and many individual retailers are continuing a strong positive trend—which makes sense, of course, because REITs will perform better in a strong retail environment when retailers are doing well.
While the headlines continue to be positive, the bottom lines are still a bit mixed. A number of strong, innovative brands have seen their stocks rise to all-time highs, but some have missed the boat at a rather inopportune time. In particular, traditional teen retailers like Aeropostale and Abercrombie & Fitch continue to struggle. But, as we all know, down doesn’t always mean out in this industry. Some retailers that have struggled in the past have come roaring back. Think Limited Brands.
All of this gets me thinking about what makes that key difference between success and failure; where, how and why do we draw the line between “buy” and “sell?” There’s no one single answer, of course, as it depends on a number of complex factors. There isn’t always a correlation between specific industry performance and retailer strength: Electronics is going like gangbusters these days, but Best Buy is still limping along. In the case of fashion retailers, especially teen fashion retailers, the fickle nature of the consumer often has a huge impact on performance.
Something else that I’ve been thinking about is how this new-found stock market strength could impact retail expansion plans. I think these strong numbers from retail stocks might indicate that retailers will be loosening up the purse strings a little bit and taking a more aggressive approach with their expansion plans. Obviously, this isn’t exactly a brand new development. Keeping in mind there’s always a lag time between making a big-picture expansion plan and actually executing one, the strength we’re seeing from stocks now will have more of an impact on 2014 expansions than it will on 2013 plans. Those deals are already done and leases are signed.
In my mind, the bigger question is, “Will this stock strength continue?” I think it will. In fact, I expect the Retail Index to go up even further on the heels of recent strong holiday sales forecasts from NRF and ICSC. That said, I think retailers thinking about their expansions should proceed with some degree of caution. After all, the last time the economy dropped off a cliff and the retail bubble popped, it became clear that many retailers were overextended, thanks to the push from Wall Street to grow. In the grand scheme of things, expansion and retraction is a necessary process for our industry. Any good chain closes some stores and opens others every year. There will always be some locations that are not optimal, and new opportunities for strategic growth and repositioning. I think that, while the numbers are very positive, retailers should continue to be guarded in their optimism. If we’ve learned nothing else from the recent recession, we should know by now that caution can be a lifesaver.
What do you think? Please make a public comment below or feel free to e-mail me privately at [email protected].
Click here for past columns by Jeff Green.
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