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Quarter-End Insights

Consumer Cyclical: Tepid Mall Traffic Could Constrain the All-Important Holiday Season

Retailers realize foot traffic is declining, but reactions have largely failed to return performance to historical growth levels.

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  • Consumer cyclical sector valuations declined slightly this quarter, with a weighted average price/fair value ratio of 0.98, coming in behind last quarter's 1.01. We attribute this decline to fears regarding Amazon's (AMZN) capability to disrupt a number of retail industries.
  • Moving into the fourth quarter, we think attention will shift to holiday traffic in brick-and-mortar locations. Past trends have not been strong, with brick-and-mortar net in-store sales dropping 5% and the number of transactions falling almost 8% over both Thanksgiving and Black Friday in 2016, according to RetailNext.
  • We believe the U.S. retail category may be overstored because of disruptive e-commerce forces. According to data from icsc.org, a shopping-center trade group, the United States has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia, the next-highest countries.
  • That said, we believe there are a handful of traditional retailers offering some combination of product specialization, convenience, and experience that have been excessively punished by the market.

Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.