By Paul Vigna 

The holiday season is expected to be brutal for many retailers. Investors are bidding up their stock prices anyway.

Holiday spending is projected to fall 7% from 2019 to an average of $1,387 per household, according to a Deloitte survey of about 4,000 consumers. Of those respondents, 38% said they expect to spend less this year compared with last year.

That should be troubling news for retailers, which typically do their biggest business of the year in the weeks between Thanksgiving and Christmas. The sector is under especially acute pressure in the midst of the coronavirus pandemic, which has forced many Americans to tighten their purse strings and reduced foot traffic at malls.

Many investors still say they see reason for hope.

The S&P 500's consumer-discretionary sector -- home to Target Corp., Nike Inc. and Hasbro Inc. as well as Amazon.com Inc. -- is up 11% over the past three months. The staples sector, which includes Procter & Gamble Co., Costco Wholesale Corp. and Estee Lauder Cos., is up 5.5%.

"We all left retail for dead three months ago," said Nicholas Colas, co-founder of research firm DataTrek. Yet there are reasons to believe the retailers that survive this year have upside in the years ahead, he said.

Big retailers such as Amazon and Home Depot Inc., which have both benefited from changes in consumer behavior during the pandemic, aren't the only stocks notching big gains. The S&P Retail Select Index, which was launched in 2006 and includes 84 smaller retailers like Carvana Co. and GameStop Corp., has doubled from its March lows and recently tagged a new all-time high.

Among the retailers that typify the renewal of hope in the sector is Gap Inc. Its shares surged 14% Thursday after the company delivered an optimistic investor-day presentation. The company is making progress with brands like Old Navy and Athleta, improving its offerings and planning store closures.

Those are the kinds of moves investors like to see. Gap shares are up 64% over the past three months and trading around $21 -- still a far cry from their high above $45 in 2014.

Carvana and GameStop have also taken steps to cut costs. The e-commerce used-car seller stopped launching new vending machines and opening up in new markets, while GameStop cut salaries for executives and staff, slashed inventory and cut capital spending. Carvana shares have risen 37% in the past three months, and GameStop has more than tripled.

Many retailers have done well to pivot toward things such as casual-wear and home d├ęcor that customers want in this pandemic year, said MKM Partners analyst Roxanne Meyer. Other key trends have been improvements in technology that have helped retailers manage inventories, get products to customers and keep their websites updated.

"That becomes a critical factor," she said. "This will be one of those seasons that shows who's made the right investments."

Industry consolidation has also been a boon to the companies that have managed to keep their doors open. Through last week, there have been 134 bankruptcies of public companies or private firms with public debt in the consumer space, according to data from S&P Global Market Intelligence.

That includes well-known retailers J.C. Penney Co., Neiman Marcus Group Inc., Stein Mart Inc., Brooks Brothers and Century 21 Department Stores LLC. In total, there have been 527 bankruptcies in the U.S. this year, the highest number through mid-October since 2010.

In essence, what 2020 did was force a round of consolidation within the retail industry that was years overdue, DataTrek's Mr. Colas said. Although painful for the companies that went out of business and employees who lost their jobs, for the survivors, it represents a chance to compete for market share.

Consolidation is also good for investors, Mr. Colas said. "You always want to own an industry coming out of a recession that's gone through a significant consolidation," he said. "It's very painful, but as far as what it means to the survivors, it's a positive."

Other investors appear to be betting on the benefits of another round of government support.

House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin remain in negotiations over a new stimulus package. An agreement could come after the election, Mrs. Pelosi has suggested, meaning stimulus checks might arrive in time for the holidays.

What's unclear is whether consumers would spend the extra money. The first round of stimulus checks helped boost retail sales, but many Americans sacked that money away and the personal savings rate hit a record 32% in April.

To be sure, headwinds still abound in the sector. Profits remain under pressure. The S&P 500's consumer discretionary sector is expected to post a 33% profit contraction in third-quarter earnings, according to FactSet. The staples sector is seen boosting profits by 1%.

And industry consolidation is just getting started, Ms. Meyer of MKM Partners said. Gap plans to reduce the number of stores it operates in North America by 30% by the end of 2023. GameStop, Bed Bath & Beyond Inc., American Eagle Outfitters Inc. and Victoria's Secret parent L Brands Inc. all intend to close more stores in coming years.

"There's a lot more that needs to come out of the system," she said. "Unfortunately, the pandemic accelerated what was ultimately going to happen anyway."

Write to Paul Vigna at paul.vigna@wsj.com

 

(END) Dow Jones Newswires

October 25, 2020 10:14 ET (14:14 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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