Main Street’s Revenge: Going “Small” Is The Next Big Retail Trend

The stock market appears dangerous and volatile this week, as President Trump’s multiple scandals stoke fear among traders that the beleaguered president won’t be able to fulfill his pro-business agenda. That’s why it’s particularly important for you to tap trends that enjoy sufficient momentum to outlast temporary turmoil — and the restructuring of the retail industry fits the bill.

Americans increasingly demand a distinctive shopping experience, not in word as Big Box retailers promise, but in deed as some small-cap companies are actually accomplishing. Below, I highlight an exchange-traded fund that benefits from this economic, social and cultural disruption.

With more retail sales concentrated among a narrower band of large retailers, shoppers are looking for products and services that stand out from the pack. But today, when they visit shopping malls, they mostly experience a vast wasteland of generic sameness. It’s no wonder that consumers are flocking to e-commerce in droves.

But this dynamic creates an opening for smaller companies that have forged a compelling identity. Demographic shifts also favor small specialty retailers and service providers. The maturing of the huge Baby Boom generation is creating a fickle but affluent class of customer who is looking for a more emotionally rewarding shopping experience that mimics the feel of Main Street.

Don’t get me wrong: I don’t think shoppers will totally abandon the Big Box stores. The more adaptable ones, such as Personal Finance Growth Portfolio holding Target (NYSE: TGT), are implementing strategies that are on course to reinvigorate their flagging sales. But the decade will continue to witness a winnowing down and consolidation of mass-market retail, which will give new life to marketing-savvy smaller retailers, service providers and consumer goods companies.

The brick and mortar millstone…

Meanwhile, the following reader disagreed with the optimism expressed over Target in the May 17 issue (What Darwin Can Teach Us About Retail Stocks). Instead, he offered a brutal but perceptive assessment that deserves a fair hearing:

“I do not believe that Target’s new roll-out and re-imaging effort will help them back to their former level. The Internet shopping phenomenon is not going away. The new Target idea still requires an effort to get in a car and drive to stores, just as always.

Another entrance with some dubious status or purpose does not make shopping per se any more convenient. And curved aisles? What the hell does that mean/do for anyone? Are we to fantasize about a resort path… or what?

While I think Target’s product mix and client loyalty are okay, they will not be spared the brick and mortar millstone that weighs upon all heretofore thriving retailing establishments. When the credit crisis hits and disposable income shrivels, even those metro close-by shoppers will not spend at any former levels.

That’s my bet going forward. We’ll see more Internet shopping with free shipping, returns and eventual pricing concessions. Malls and physical stores will get their rears handed to them.” — Ralph J.

Distinctive brands gain a foothold…

Ralph, I’m never afraid to publish the views of readers who disagree with us. You make some valid points, but your conclusions paint all Big Box retailers with the same brush. We still think Target is making the right moves for future growth, as explained in detail in the May 17 issue.

The fact remains: high-quality, small-cap retailers and consumer discretionary companies with distinctive brands are poised to benefit from the woes of large retailers.

For investors looking to profit from this trend, consider the PowerShares S&P SmallCap Consumer Discretionary Portfolio ETF (NYSE: PSCD). The fund seeks investment results that correspond to the S&P SmallCap 600 Capped Consumer Discretionary Index. Holdings are companies that provide food and beverages, household durables, leisure products and services, apparel and luxury goods, computers and electronics, discount drugs, and more.

PSCD’s top holdings include Five Below (NSDQ: FIVE), a fast-growing chain of discount stores that sells products that cost up to $5. With a market cap of $2.8 billion, the chain’s customer base skews heavily toward teens and pre-teens.

The fund’s other major holdings include: Steve Madden (NSDQ: SHOO), which designs and retails private label footwear for women, men and children (market cap: $2.2 billion); Dave & Buster’s Entertainment (NSDQ: PLAY), the family restaurant chain that incorporates elements of a video game arcade and sport’s bar (market cap: $2.7 billion); The Children’s Place (NSDQ: PLCE), a children’s specialty apparel retailer (market cap: $1.9 billion); and Lumber Liquidators (NYSE: LL), a discount retailer of hardwood flooring and accessories (market cap: $734 million).

PSCD’s other noteworthy small-cap holdings:

Bob Evans Farms (NSDQ: BOBE), a provider of foods for grocery retailers (market cap: $1.3 billion); Wolverine World Wide, a specialty footwear maker (market cap: $2.4 billion); Lannett Company (NYSE: LCI), a generic drug maker and distributor (market cap: $765 million); and iRobot (NSDQ: IRBT), which builds and retails robots for consumer use, notably the Roomba floor vacuum (market cap: $2.4 billion).

With net assets of $62.3 million, PSCD boasts a low expense ratio of 0.29%. The fund has racked up a total return of 3.8% year to date, and 14.3% over the past 12 months. If you’re looking for a safe, convenient and inexpensive way to make money from the transformation of American retailing, this ETF is the right choice.

Also keep in mind, small- to mid-cap stocks are expected to outperform large-caps this year, as economic recovery continues and tax policies favorable to the “small fry” are considered in Congress. Despite the political uncertainty now bedeviling the markets, there’s enough good news on the economy to keep consumers in a spending mood.

Got a question or comment? Opposing views are always welcome. Send your bouquets or brickbats to: — John Persinos

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