Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

At least one Wall Street firm is betting brick-and-mortar retailers make a comeback this year. Wishful thinking. 

In a recent report entitled, "Getting Back to the Business of Investing," Piper Jaffray analysts strike an odd, wistful tone urging investors to start trading retail stocks again: 

"We've considered hanging up our cleats and riding off into the sunset in what is our 20th year on the sell-side, but we think we see something being overlooked by the investment community which could provide a reason to consider investing in our coverage once again." 

In other words, even though the string of retail bankruptcies continues (the latest being Sports Authority on Wednesday) and you think the retail industry is slowly crawling to its doom, the death march is overblown. 

The plea sounds a bit desperate (especially considering most sell-side analysts make money by driving up trading volume and getting clients to trade the stocks they cover), but let's unpack the argument anyway. 

Piper argues that customers stopped shopping at traditional retailers because they were spending an increasing amount of time online. So by that logic, plunging retail traffic will stabilize if time spent online and e-commerce growth plateaus. 

They also assert that capital expenditures will slow, as traditional retailers have already invested billions of dollars to catch up to their e-commerce competitors. Plus, they point out that valuations are inexpensive at an average 5.5 multiple of enterprise value to Ebitda for their coverage stocks, which include Abercrombie & Fitch, Gap, and Kohl's. 

Not so fast. There's a reason why shares in these companies come cheap. 

It is true that e-commerce sales growth in the U.S. has flattened -- but the industry is still posting roughly 15 percent year-over-year growth, according to the U.S. Census Bureau. That's pretty remarkable considering e-commerce makes up 7.5 percent of total retail sales (and much higher in certain categories, such as apparel and electronics) and that sales growth at traditional retailers only rose by 1.3 percent during the fourth quarter from the year before. 

And while traditional brick-and-mortar retailers such as Macy's and Nordstrom now bring in billions of dollars via the web, Amazon still makes up a disproportionate amount of total online retail sales

Clickbait
Year-over-year growth in U.S. e-commerce sales
Source: U.S. Census Bureau

Piper makes the case that e-commerce's share of total retail sales is more like 40 percent, a calculation the firm explains excludes categories "that are not commonly sold online," such as food, beverages and building materials. That, along with the idea we've hit peak mobile penetration, suggests online shopping has hit a saturation point that will cause web sales to level off and the shift from offline to online commerce to abate, according to Piper.

I beg to differ. There's a lot more e-commerce growth to be had in the areas Piper excludes. Industries that were long considered to be "Amazon-proof" -- bulky home goods, makeup, jewelry -- are quickly gaining traction online. Just look at home goods retailer Wayfair, or companies such as Instacart and Walmart that are finding new ways to get customers to go online to buy their groceries (historically the hardest online category to penetrate). 

And while mall operators insist customer traffic trends are improving, the growth seems to be concentrated in  the best 300 or so malls. Numbers from Prodco show shopper traffic at brick-and-mortar retailers hasn't grown since the first quarter of 2012. And there's no reason to believe the traffic losses will suddenly reverse. 

Traffic Jam
Year-over-year percentage change in North American retail traffic
Source: Bloomberg, Prodco

 

There's also no indication that hitting a natural limit on the amount of time people spend online will reverse a decades-long consumer shift away from physical retail. 

Time Swap
Source: comScore, ShopperTrak, Piper Jaffray

Finally, Piper's idea that traditional retailers have already invested so much in e-commerce that capital spending will now decrease is simply out of step with reality. If Amazon is any indication, e-commerce is not a one-quarter or a one-year investment. 

Growing Up
Amazon continues to invest to grow its business
Source: Company filings

As Amazon pushes one-hour delivery and "dash buttons," which let customers reorder goods with the push of a button, traditional retailers such as J.C. Penney are just now rolling out concepts as basic as the option to buy items online and pick them up in the store. Many brick-and-mortar retailers still don't let customers return online purchases in their stores and are struggling to deliver goods to shoppers on time and deal with online returns.

So yes, steps taken by Macy's, Kohl's and others to close stores and direct more dollars to e-commerce will help drive productivity and boost sales. But the industry is certainly not in the clear. And while there will always be a place for physical stores -- just look at the web retailers opening up stores  -- hoping we've hit "peak e-commerce" and that store traffic will suddenly shoot up is just a fantasy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net