Here is an important chart as it relates to the Retail investment case over the coming quarters. Breaking down yesterday’s retail sales results, we are looking at the added dollars year over year for ‘discretionary’ retail (retail ex Food, Gas, and Auto) split between non store retail (mainly ecommerce) and the implied brick & mortar (B&M) performance. We use TTM to smooth out the underlying trend vs the choppiness of monthly results, and ultimately the direction of the bars is what we care about. The blue bars have been and are continuing the downward trend, and assuming the rate of change of US retail continues to slow, we’ll see the B&M dollars go negative within the next couple quarters. We are at the point in time where ecommerce is taking wallet share again, with penetration into retail sales rising after a moment of reset post the pandemic online boom. We expect ecommerce to continue to take share, that trend coinciding with a likely slowdown in aggregate retail spending would mean big dollar flow compression for B&M discretionary retail. This is clearly bearish for almost any company who has stores not focused on food/necessities. Beyond the obvious sales risk there is an additional margin problem as well since we have inflating rent and labor costs for these physical stores at the same time the store sales productivity is likely to slow/compress. Over the long term these blue bars have historically tracked the direction of the XRT reasonably well.
For more on our Bearish thesis for Retail heading into 2H2023 see our 3Q 2023 Retail Themes Presentation: Replay Video Link CLICK HERE
