Why slowing retail earnings growth isn’t a bad thing

As we reach the tail-end of earnings season, we’ve seen a majority of companies report in line or slightly better than anticipated. It looks like this may be the end of earnings growth, but overall earnings are positive. However, slowed corporate earnings isn’t necessarily a bad thing, and it doesn’t equate to companies losing money. For one, companies are hiring people. After several consecutive quarters of growth, companies need more employees. Salaries are the largest cost for most companies, so it has had an impact on businesses bottom line, leading to lower earnings this quarter. However, this isn’t an indicator of a recession, it’s just part of the normal business cycle.

Outlook for the retail sector

As more people join the workforce and make money, we see great opportunity in the retail sector. Americans as a whole are spenders, not savers. With more money in our pockets, the more we have to spend on discretionary retail. Over the next few weeks we’re going to see who “won” the holiday retail season in 2018, and that’s exciting if you’re trying to figure out which retailers to have in your portfolio. The National Retail Federation reports that this holiday season was positive, while earnings aren’t aligning with that notion.

It’s an exciting time for a portfolio manager to evaluate stocks because there is a dramatic shift largely due to the “Amazon effect” and the way millennials and people want to shop. This seismic upheaval of how consumers shop is changing the game. Consumers want omni-channel options, which makes this fundamental change of what people demand from the economy exciting: there’s going to be winners and losers.

What this means for investors

It’s important to understand the dynamics of the consumer when it comes to how they’ll spend their dollars. While following a company closely and knowing it’s fundamentals are key to building a solid portfolio, you have to understand its competition as well. You may not think electronics and clothing are competitors, but for gifts they are. And, this year, there were more sweaters than smartphones under the Christmas tree. While tech may not seem like retail all the time, it is. It’s not just investing in siloed industries, it’s essential to have a holistic view of the market.

Nathan Boxx, Bradley Newman, Jason Seltzer

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