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What Darwin Can Teach Us About Retail Stocks

By John Persinos on May 17, 2017

A quick disclaimer: I hate to shop. Long ago, I delegated most personal and family shopping to my wife Carole, who loves to browse in stores.

I blame evolution. In ancient hunter-gatherer cultures, men were the hunters and women the gatherers. When men spotted game in the wild, they’d try to quickly kill the beast before it could run away.

Women, by contrast, were driven by the need to methodically determine the quality of every berry, leaf and root before slipping it into their baskets. These tendencies are now baked into our psyches.

Keep those Darwinian laws in mind, guys, next time you’re bored out of your skull in a clothing store, while your wife tries on blouse after blouse.

The rise of the “sheconomy”…

Fast forward from prehistoric to modern times. According to the marketing and consulting firm Sheconomy, women currently account for over 80% of consumer spending in the U.S., or about $5 trillion dollars annually. Baby Boomer women age 50 and older control net worth of $19 trillion and own more than three-fourths of the nation’s financial wealth.

Nonetheless, in today’s ferociously competitive retail environment, the companies that thrive will be those that appeal not just to women but also to men and diverse age groups, especially Millennials.

Below, I highlight a legacy retailer that understands these imperatives. The company also happens to belong to the Growth Portfolio of Personal Finance, our flagship publication.

Profiting from creative destruction…

President Trump’s economic program focuses on the negative effects of global trade on domestic manufacturing. But America’s dominant private sector employer is retailing and its worst enemy isn’t Mexico — it’s Silicon Valley.

According to the U.S. Bureau of Labor Statistics, the manufacturing sector directly accounts for 12.5 million jobs, making it the third-largest employer by industry. Health services comes in at number two, with 19.8 million workers. Topping the list by far is the retail trade, at 28.9 million jobs. Both retailing and manufacturing continue to shed jobs, while health care employment is expanding.

The biggest threat to retailing is new technology, not trade. Ironically, economic nationalism will accelerate the threat of technological disruption against U.S. retailers, because companies in the sector that aren’t able to outsource jobs will compensate by investing in labor-saving machines at home.

A time-proven way to make money over the long haul is to invest in companies with disruptive technologies that are transforming business models. The rise of e-commerce pioneer Amazon (NSDQ: AMZN) epitomizes this truism. The advent of online shopping has upended the retail business and turned many once-dominant retail names into dinosaurs, much the same way web-based publishing has decimated many famous magazine and newspaper titles.

However, this “creative destruction” poses enormous opportunity for investors. The decline of conventional ways of shopping doesn’t necessarily doom all legacy retailers. As in the natural world, survival hinges on flexibility and adaptation.

Reinventing the “Big Box” experience…

Which brings me to retailer Target (NYSE: TGT), a relatively new member of the PF Growth Portfolio. Target is among the few brick and mortar retailers with a proactive strategy to counteract the e-commerce onslaught. Sixty percent of Target shoppers are women. Accordingly, the store’s plan is heavily focused on their sensibilities, although not exclusively.

Target’s sales and stock price have been under pressure, but Target CEO Brian Cornell has no intention of letting the company just fade away like many of its peers. Cornell recently spoke of the need to rethink Target’s Big Box concept. “We’ve got to reimagine that store experience,” he said. “Today’s Millennial shopper doesn’t enjoy shopping one of our tired stores that hasn’t been touched in 10 years.”

Cornell has launched a $7 billion project to renovate existing stores, expedite the expansion of smaller-format locations, and beef-up Target’s e-commerce presence.

Target currently operates roughly 1,800 locations throughout the country. Over the next three years, more than 600 stores are slated for overhaul.

The new stores will be outfitted with a separate entrance reserved for customers who are darting in to pick up orders executed online, as well as to grab groceries or wine. Shoppers who want to browse and take their time will use another entrance that will lead them past new branded boutique-type areas designed to resemble upscale specialty stores.

And the store aisles will be curved, rather than straight, to encourage exploration, according to Target Properties’ senior vice president, Mark Schindele. The Houston area will see the first remodeled store this fall, followed by 40 other locations that will be redesigned by October.

The company is initiating other, more subtle changes to enhance ambience and the overall shopper experience, such as swapping out fluorescent bulbs with LED track lighting and clustering grocery items that comprise a single type of meal. Target’s management has promised to calibrate the store designs according to customer feedback.

Against the herd…

Jim Pearce, chief investment strategist of Personal Finance, is long-term bullish on Target. Indeed, he took the contrarian stance on April 7 of adding this traditional retailing stock to the PF Growth Portfolio. Over the years, I’ve learned to trust Jim’s against-the-herd reasoning.

Jim explains his optimism over Target:

“Target’s new store design won’t pay off immediately, which is why some investors gulped at the dour outlook for sales this year in a recent earnings report. Target expects same-store sales to decline mildly in the second half of 2017, with a comparable drop in earnings. That’s one reason why the share price fell 20% in the weeks following the Feb. 27 report, but the stock has shown signs recently of stabilizing.

Although some of Target’s institutional shareholders have already bailed, insiders know a good deal when they see one. Since the stock’s 20% drop, three of the company’s officers and directors bought more than $1 million worth of Target stock. They probably don’t expect the share price to roar back to life overnight and neither do I. But look for its recovery to accelerate once it becomes clear that neither Amazon nor the border tax will be Target’s undoing.”

The fact is, consumer spending remains robust. Americans haven’t stopped shopping; they’re just spending their money in new ways. Big Box retailers and conventional shopping malls do indeed face steep challenges from the rise of e-commerce, but for investors the trick is to separate the winners from the losers. Our investment team will help you.

Got any comments or feedback? Send me a letter: — John Persinos


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