This Black Friday bag yourself a retail bargain

This Friday the notorious ‘Black Friday’ shopping spree will take place after the US Thanksgiving holiday. While this is now a global event, we are focussing on the US due to some UK retailers’ reluctance to participate in the heavy discounting that it often entails. Retailers are trying to out-do each other with bargains, however the one to watch is the ongoing battle between the traditional bricks and mortar retailers and the online giants.

Hope for the traditional retailers?

Usually one assumes that the online giants will grab all the headlines (and upside stock price potential) around the Black Friday period, as surely they will see sales surge more than any traditional retailer would? While this is most likely true, and the likes of Amazon are expected to eclipse their traditional rivals especially in overall sales and discounts, there is still hope for the bricks and mortar retailers.

Chart 1 below shows the Conference Board consumer sentiment index, the retail sector of the S&P 500 and Amazon. The chart has been normalised to show how these three variables have moved together over the last year. This chart suggests a few things:

• Amazon has pulled away significantly since April, suggesting that the online giant doesn’t have any particular relationship with consumer confidence or traditional retailers. This is to be expected, as Amazon has successfully surfed the FANG wave and is considered more of a tech stock than a retailer anyway.
• The fact that Amazon doesn’t trade like a traditional retailer, even one with an ecommerce business, suggests that Black Friday has little bearing on the Amazon share price, it is being driven by separate forces.
• Far more interesting from a Black Friday perspective, is the close relationship between the Conference Board consumer sentiment index and the S&P 500 retail sector. As you can see in chart 1, these two track each other closely.
• Conference Board consumer sentiment is at its highest level for 16 years. This suggests that consumers are upbeat as we approach Black Friday, which could also benefit the bricks and mortar retailers.

So, if we can assume that the relationship between consumer confidence and retailers will hold, and if we also assume that Amazon is less sensitive to Black Friday, which retailers should we be looking at this Turkey Day?

• Dollar Tree: this discount store has seen its share price surge. Lacklustre wage growth at the same time as consumer confidence is bouncing back is a potent mix for the discount sector, especially since Dollar Tree’s share price is close to its highest ever level of $99.93; a strong Black Friday could push this stock above the $100 mark.
• Gap: its share price has also rallied into Black Friday after Q3 earnings beat estimates and sales growth rose year on year. Its share price is now at its highest level for a year, and the path of least resistance seems higher for Gap. $31.80 – the 50% retracement of the 2014 high to the 2016 low is the first key level of resistance ahead of $35.30 – the 61.8% retracement level. Gap’s size, global scale, and mid-range product pricing means that it can suck up the discounts that are likely to erode profit margins this year.
• Macy’s: this stock has been a major laggard this year due to internal issues, weakness in its online trading business and its sensitivity to the deep level of discounting that is required to attract shoppers. Bloomingdale’s, also owned by Macy’s, posted its 11th quarter of declines in same store sales in Q3. The company is hoping to benefit from a shift in strategy by the new CEO Jeff Gannette and this Holiday season really is make or break for Macy’s. This is a stock that we would approach with caution, however, if it does post strong Black Friday sales and footfall in its department stores, then its share price could be due an uptick. At only 7x earnings, those looking for a bargain, while they may shop at Dollar Tree, might prefer to buy Macy’s.

Overall, we are cautiously optimistic as we head into Black Friday that traditional US retailers could benefit as consumer confidence remains strong. As you can see above, some retailers are in a better position than others, and while it’s tempting to only think that Amazon could benefit this Turkey Day, there are other retail bargains to be found.

Chart 1:

Source: Bloomberg and City Index