“Rock Bottom Retail” Flashes a New Buy Signal

“Rock bottom retail” is at it again.

Brick and mortar retailers were largely ignored during last week’s stock market swoon. But now that the dust has settled, one thing is certain: Retail earnings are mess. In fact, no relief is in sight for some of these troubled companies.

The first half of the year was a disaster for “mall anchors” Macy’s Inc. (NYSE:M) and Dillard’s (NYSE:DDS).  Macy’s shares dropped 9% on Thursday after reporting declining sales. The stock now sits near seven-year lows. Dillard’s dropped 15% on the same day, losing all the positive momentum the stock had built in June and July.

Even popular discounter Kohl’s took its lumps last week. The stock has lost 10% of its value over the past five trading days.

These latest retail disasters are simply the new normal, according to the financial press. The steady drop in foot traffic and revenue shouldn’t surprise a single investor who’s followed the industry since it started to roll over in 2015…

“While the moves are large — Macy’s and Kohl’s were among the worst performers in the S&P 500 Thursday morning — it hasn’t been unusual for retailers to sell off sharply after reporting results in recent years,” The Wall Street Journal reports. “This is the fourth straight quarter where Macy’s and Kohl’s shares were down after earnings. The last time Macy’s and Kohl’s had bigger one-day moves: on May 11, after their last reports.”

It’s no secret these stocks are struggling. But there’s more to the “death of retail” story the media have crammed down our throats this year.

It’s true that traditional retailers are having a tough time adapting to the realities of the online shopping landscape. The death of the shopping mall and the rise of Amazon and the online shopping revolution are unstoppable forces in the market today. As it continues to shake out, we noted recently that you will see more poorly run, unfocused retail operations hit the skids.

That’s what’s happening to stores like Macy’s and Dillard’s. These average, big-box mall stores suffer because they don’t offer customers a unique shopping experience. They’re forced to run countless locations, manage inventory, and appease customers with big discounts – all things Amazon doesn’t have to worry about.

That’s a recipe for retail disaster. After all, why would I go to Macy’s to buy a toaster when I can just order one online without a second thought?

But there’s another side to this coin. While Amazon is dominating the retail landscape right now, the concept of physicalstores isn’t going anywhere. It would be silly to assume every single retail location in the country will close its doors and declare bankruptcy. Like any industry that finds itself in turmoil, the best businesses will adapt and survive.

Brick and mortar retail will survive alongside Amazon in one form or another. While the old mall stores take their licks, there’s one forgotten corner of the retail sector that’s starting to perk up.

I’m talking about dollar stores.

Extreme discounters and dollar stores are anything but fancy. That’s where they have an edge over other traditional retailers.

Have you been inside a cramped Dollar General Corp. (NYSE:DG) lately? New Dollar General locations are popping up all over rural America. The company is planning to open 1,000 stores before the year is finished. That’s an aggressive expansion plan—especially when you have Amazon breathing down your neck.

But management’s approach to the cheap crap retail segment is playing out perfectly. Instead of bogging down the balance sheet with massive stores and tons of staff, Dollar General has a minimalist approach. Good deals in small stores make it easy for shoppers to get in and out. That’s why the company is bucking the trend and expanding in this dismal retail environment.

Then there’s trendy “value retailer” Five Below Inc. (NASDAQ:FIVE).

Five Below is true to its name. The store offers an array of colorful products from $1-$5 that generally appeal to teens and young adults. More importantly, its stock has enjoyed an impressive run over the past few months. Even after retreating from its June highs, the stock is still up almost 25% year-to-date. That’s nothing to scoff at – especially when you consider that Amazon stock is beating FIVE’s performance by just about 5% so far this year.

That’s right – an old-fashioned retailer is almost keeping pace with Amazon right now.

If you’re fully dedicated to selling cheap junk, you just might have what it takes to survive Amazon’s e-commerce onslaught. Amazon might be top dog. But the dollar stores have a great chance at thriving over the next few years as the sector shakeout continues…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning