Sector Spotlight - Retail: Risk and Opportunity in the Retail Industry

Equity Analyst, Maile Clark addresses the retail industry and the potential long-term opportunities in this market.

 

 

 

NEW Title: Sector – Retail / Risk and opportunity in the retail industry

 

Abstract: In this video, MFS Equity Analyst Maile Clark and Institutional Portfolio Manager Rob Almeida discuss active management and potential long-term opportunities for differentiation in the retail industry.

LinkedIn: What drives stock prices in the retail industry? Watch this video featuring MFS Equity Analyst Maile Clark to learn more.

 

Rob Almeida:

So now we have a supply demand imbalance almost, if you will. So the internet has brought on a massive supply of goods, its deflated price to the benefit of the consumer, to the detriment of the retailer. Now we're starting to see that in the marketplace. Is that fair?

 

Maile Clark:

Oh, absolutely. Retail margins have been on the decline for the past several years.

 

Rob Almeida:

And where are they going to go?

 

Maile Clark:

My suspicion would be there'll be a stabilization at some point, and there'll be a real separation of the winners and the losers.

 

Rob Almeida:

Now that's interesting, because that's something that we really haven't seen just in general in the marketplace off the ‘08 bottoms.  The lack of dispersion, high correlation in stock prices.  So are you saying, are you implying, that there is more opportunity as an active manager, as an investor, to differentiate yourself versus a benchmark?

 

Maile Clark:

Without question.  Whenever industries change in a non-linear fashion it creates opportunity.  And the length of our time horizon is really an advantage here.  It allows to look out, not just at the current trend, but to really think about an industry's going to look like over a very, very long time.

 

Rob Almeida:

Now, investors in general tend to anchor to things that don't matter, right?  So, in your universe perhaps it's weather related issues that pertains to shopping, store traffic surrounding the holidays, maybe the health of the labor market.  But what really matters as it pertains to retail ... What's most important to you as you think about it?

 

Maile Clark:

Over the long term, growth, profitability and returns.  And what we really need to see is returns to stabilize in retail, and then you can start to really see over time who's going to be a winner and a loser.  We really have to look at sort of the capital being employed right now in the industry, there's a much higher demand on capital in order to create an omni channel experience, and who's going to be able to capitalize that over the very long term is really where we want to be.

 

Rob Almeida:

At this current rate, we're likely to see half of assets managed in the United States in a passive oriented vehicle.  Whether it's an ETF or a generic passive product.  All of these products are leveraged to some of these companies that are over-earning, and they're probably under leveraged to some of these companies that possess a form factor or a logistical advantage or an e-commerce disruptor.  So, are you seeing opportunities as an individual investor, whether it's to own names that are under-earning, or to avoid names that are over-earning?

 

Maile Clark:

So, I think what we importantly do here is we focus on a very long term time horizon, and I think that gives us the benefit of looking out many years.  Some of these secular challenges are pretty long term in nature.  So, if we think out over that time horizon, and you're a passive investor and you own the benchmark, you're, by nature of that, going to own some of the names that are secularly less positioned because they were yesterday's winners.

 

Rob Almeida:

Right.

 

Maile Clark:

And we're really looking for tomorrow's winners.

 

Rob Almeida:

Right.

 

Maile Clark:

So, absolutely there are opportunities to avoid some of these names in up and coming areas, but more importantly, we really need to avoid companies that are not well-positioned to adapt to this environment.

 

Rob Almeida:

And you're working with the portfolio managers to make sure that we have exposure to these names and we're not exposed to, obviously, those names that have potential CapEx rising and margin degradation.

 

Maile Clark:

Absolutely. And I think both are equally important. It's going to be picking the winners and avoiding the melting ice cubes, of which there are several.

 

The views expressed are those of the speakers and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.

 

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