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The Changing Face of Retail

The market struggled to gain traction this week in the face of growing concerns over the rise in confirmed cases of COVID-19.  However, the unease can’t completely be chalked up to the virus.  In less than a couple weeks companies will begin releasing second quarter earnings and without having the benefit of corporate guidance, investors are understandably cautious.  The handful of companies that have reported already have been somewhat lackluster adding to the uncertainty.

The second wave, that experts thought might come this fall, is here a bit earlier than expected. Twelve states are now in the red as both testing and the number of confirmed cases skyrocket. What had been a pretty constant 20,000 new infections per day has doubled in the past week. Florida reported a record rise of 11,445 cases in a single day, closely followed by Texas which reported 8,258. For the vast majority of investors, this means a reevaluation of the potential impact on companies, industries, and sectors. We are no different, as we look at our holdings and determine which could be most affected.

One area that will almost certainly be impacted is the retail industry which was on the path to recovery, with the addition of masks and social distancing. However, the most recent trend has seen a reversal. Last week, retail traffic was down 39.5% y/y after being down 34.0% two weeks prior and 35.7% one week prior. The biggest drop-offs are happening in Mississippi, Texas, South Carolina, Louisiana, and Alabama as might be expected.

In terms of retail, it seems more companies are focusing their efforts on increasing online sales. Walmart announced this week it is taking on Amazon Prime with a $98/year delivery service which also includes video entertainment, discounts on gas, product deals, and two-hour delivery. Along the same lines, Uber said it is launching an in-app grocery delivery service beginning in Dallas and Miami later this month. Other retailers are looking to expand into non-traditional areas. For example, Walgreens, which reported poor earnings this week and is planning on cutting jobs, is looking to get into primary care. It is redesigning as many as 700 stores in the U.S. over the next few years to offer expanded primary care clinics.

Other retailers have struggled to make the turn. One such example is Brooks Brothers which filed for bankruptcy this week due to what’s been dubbed the “pajama-working” culture. It goes without saying, those working from home don’t require three-piece suits. Another retailer that seems to be struggling is Bed Bath & Beyond which not only missed earnings this week, but announced it is closing 200 stores over the next two years. While I understand the immediate need to stem the bleeding, I don’t see this as a winning strategy in the long run. But not to end on a sour note, Costco is an example of a retailer that continues to outperform as its business strategy benefits from the current environment. What started as hoarding of paper goods and disinfectant, has morphed into repeat business as consumers make fewer trips but buy more. This change in shopping behavior may be here to stay.

In closing, I sometimes quote Warren Buffet or mention him in passing.  Many regard him as the greatest self-made businessman in modern history.  As of 2020, his net worth was more than $71 billion.  In 2006, he made a pledge to give away the majority of his wealth to philanthropy or charitable causes.  In his annual tradition, we learned this week Mr. Buffet gave away shares of Berkshire Hathaway valued at approximately $2.9 billion to five foundations, including the Bill and Melinda Gates Foundation.  This is the fifteenth installment since 2006 with a value totaling more than $37 billion.  His gifts have reduced his holdings in Berkshire by half over this period.  It is also worth noting, he has never sold a single share of Berkshire stock.  Now you know.

Bruce J. Mason, MBA