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Retailers will need to change how they do business in 2020 as they face more technological innovation, new shopping habits, and a demographic shift to younger consumers.
Investors in the sector will need to be nimble too.
Here are four things to watch for:
Amazon, Hasbro and Lowe’s are among the stocks to keep an eye on
UBS analysts are bullish on 20 retails stocks for 2020 with Amazon.com AMZN, +1.41% , Hasbro Inc. HAS, +0.67% and Lowe’s Cos. LOW, +0.43% among the choices.
Amazon Prime and Fulfillment by Amazon program for third-party sellers will drive revenue, UBS said.
“While we expect investments in its one-day shipping initiative to continue into 2020, we think the scale of efficiency gains paired with potential revenue upside (in both U.S. and international) is not yet well understood by investors,” analysts wrote. “Further, beyond AWS, we believe Amazon’s growing advertising business should contribute to sustained top-line momentum.”
Not only is toymaker Hasbro benefiting from the opening of Walt Disney Co.’s DIS, +0.34% “Frozen 2” movie and gains in the Nerf brand, there are synergies ahead from the Entertainment One acquisition.
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And Lowe’s is taking steps to improve pricing and promotional tools in order to recoup lost margins in the new year. Moreover, lower interest rates, stability in the housing sector and advertising efficiencies from the continued shift to digital marketing should give the stock a boost.
All three stocks are rated buy at UBS, with Hasbro upgraded on Nov. 25. Amazon has a $2,100 price target, Hasbro has a $117 price target and Lowe’s price target is $140.
Home improvement retailer Lowe’s is also a “top global idea” at RBC Capital Markets, where it’s rated outperform with a $134 price target.
“While we have long believed that part of Lowe’s relative underperformance versus Home Depot relates to their respective store bases, as Lowe’s stores tend to be located further out from major metro areas, we have also underestimated how difficult Lowe’s had made it for Pros customers to do business with the company, and improvements on this front should enable it to gain incremental market share,” analyst Scot Ciccarelli wrote in a note.
See: Macy’s, J.C. Penney join growing list of retailers that are tapping the secondhand market
Sustainability will continue to be top of mind for young consumers
Young consumers are increasingly concerned about climate change which makes environmental sustainability a top issue for the retail sector.
“We believe brands that promote sustainability will gain wallet share of younger consumers and become more relevant,” wrote Cowen analysts in their “Future of Retail” report. “In our view, there is a strong momentum toward eliminating waste among retailers.”
Secondhand retailers are also in a position to benefit from concern about sustainability. Cowen thinks RealReal Inc. REAL, +1.13% and ThredUp, which forecasts that the secondhand market will be valued at $51 billion by 2023, have an advantage.
Also: A climate-change fix is the ‘biggest investment opportunity in history’: Al Gore to millennials
Nearly half of the total sustainable merchandise is for women, 25% for children, and 24% for men, according to the StyleSage Sustainability Report.
Retail gets increasingly mobile
Cyber Monday mobile transactions in 2019 totaled $3.1 billion, according to Adobe Analytics ADBE, -0.12% data. Total Cyber Monday online sales were $9.4 billion, a record.
“The smartphone continues to radically alter the end-to-end customer experience as customers increasingly rely on smartphones to research, transact and engage with brands,” Cowen analysts say.
The rise of smartphone shopping is due to social media platforms and the influencers, brand ambassadors, and communities that have popped up on them. Cowen data shows that more than 63% of millennials ages 18 to 34 spend at least four hours per day on their mobile phones.
“We also believe that the channel has major implications for both in-store traffic and conversion as consumers use devices to inform purchases before or during shopping trips, including the use of smart labels, virtual reality and augmented reality,” Cowen said.
Even as shoppers use mobile devices and other e-commerce platforms to make a purchase, customers are increasingly opting to make the last-mile trek for their items themselves.
“We expect more shoppers to adopt and appreciate curbside pickup, which we view as an ideal manifestation of combining physical and digital retail,” Cowen said.
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Dow Jones Market Data Group Cowen data shows that 21% of the U.S. population has tried curbside pickup or buy-online-pickup-in-store for their groceries.
Walmart Inc. WMT, -0.09% and Target Corp. TGT, -0.02% are the leaders in curbside pickup, Cowen says. Both are able to leverage their large store fleets to offer the service.
“Given that the same-day options rely on our store assets, team and inventory they are much more profitable than traditional e-commerce fulfillment,” said Target’s Chief Executive Brian Cornell on the third-quarter earnings call.
E-commerce on various devices and convenient fulfillment methods are also erasing the shopping calendar.
“Black Friday will change dramatically in 2020,” said Graham Cooke, chief executive of Qubit, a personalization software provider. “There’s no need to wake up at the crack of dawn just to fight over sale items when shoppers can find great deals from their couch.”
Read: UPS expects a record-breaking 1.9 million returns on National Returns Day
Recession fears and international trade disputes will continue to impact the retail sector
Moody’s analysts think global trade policy disputes, will continue to be a risk factor in 2020, as well as a weight on consumer confidence. President Trump’s U.S. – China trade war has disrupted global manufacturing and retailing supply lines and the import tariffs have raised some prices.
“Although we do not expect a recession in 2020, recession risks are high amid a backdrop of trade policy uncertainty, [and] an unpredictable political and geopolitical environment,” Moody’s says.
“Increased trade friction could trigger spikes of volatility in financial markets and further disrupt trade flows. Many companies have so far been able to lessen the effect of tariffs through a combination of cost reductions, buildup of pre-tariff inventory and price increases within the industry supply chain. But these offsets may not last if these tensions persist.”
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Moody’s forecasts slight operating income growth to a 3% or 4% increase in 2020 for the retails sector, though analysts don’t expect “much improvement” in operating margins as retailers use promotions to increase market share.
Dollar stores like Dollar General Inc. DG, +0.68%, off-price retailers like TJX Cos. TJX, +0.06% and supermarkets like Kroger Co. KR, -0.07% are expected to outperform. Department stores like Macy’s Inc. M, -0.31% and J.C. Penney Co. Inc. JCP, -1.30% and drug stores like Walgreens Boots Alliance Inc. WBA, -0.46% are forecast to underperform.
The Amplify Online Retail ETF IBUY, +0.31% is up 29.1% for the past year, the SPDR S&P Retail ETF XRT, +0.60% has gained 13.8% for the period, and the Dow Jones Industrial Average DJIA, +0.22% and S&P 500 index SPX, +0.12% are up nearly 24% and 30.2% respectively.
