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Quarter-End Insights

Consumer Cyclical: E-Commerce a Key Threat for Some, But Not All

Although some retailers continue to cede share to online peers, some protected businesses should deliver rising profitability.

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  • Consumer cyclical sector valuations rose slightly this quarter, with a weighted average price/fair value ratio of 1.03, slightly ahead of last quarter's 0.98. We attribute this increase to rising consumer confidence, a factor that should support spending across numerous discretionary industries. 
  • Moving into 2018, we think companies will focus on faster product development, time to market, and delivery cycles to enhance the customer experience. Even  Home Depot (HD), which is relatively protected from e-commerce threats, is attempting to deliver in one day or less in its top 40 markets to drive customer satisfaction and stickiness. This could lead to higher capital expenditures across the retail landscape to maintain company competitiveness.
  • We believe  Amazon (AMZN) has essentially won the battle with retailers in commodified categories such as electronics, office products, and toys, and is now turning to categories with potential subscription/third-party seller plays (including grocery, apparel, pharmaceuticals, and beauty) or unique logistics value propositions (such as home furnishing and auto parts), which could temper operating margin potential in certain categories. 
  • That said, we still 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.

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

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