Physical Retail Isn't Dying: Here's How To Play It

The wide consensus regarding the retail sector currently is that brick-and-mortar stores are being pushed to the brink, as online retailers are steamrolling past physical retailers.

A contrarian view was revealed by Pacific Crest, a unit of KeyBanc, in a note released in March. To the question whether physical retail is dying, the firm said the answer is no. However, the firm thinks business models must be re-invented as e-commerce continues to grow. The firm sees select opportunities across consumer, REITs and tech to capitalize on a rapidly shifting landscape.

Rationalization to Accelerate

Pacific Crest expects rationalization of mall-based apparel specialty retailers and department stores to accelerate amid deflationary pressure and overcapacity. The firm said store closures at weaker retailers could make stronger retailers concentrate store fleets at only the most productive centers.

Introducing Pair Trade

Accordingly, the firm introduced a pair trade of Overweighted Urban Outfitters, Inc. (NASDAQ: URBN), which has well-positioned differentiated stores and reasonable size store fleet, and Underweighted L Brands Inc (NYSE: LB), which has strong brands but only 48 percent B+C mall penetration. Citing the prospect of further store closings, the firm moved Ascena Retail Group Inc (NASDAQ: ASNA) to Sector Weight.

Positive on High Quality Real Estate

The firm is of the view that high-quality real estate provides retailers and consumers with a relevant shopping experience. Additionally, the firm noted centers are being curated to include more experiential retail such as F&B, entertainment etc.

Pacific Crest highlighted Class A mall REITs such as Taubman Centers, Inc. (NYSE: TCO) and Macerich Co (NYSE: MAC), which it feels suffered due to the recent broader retail REIT sell-off. The firm also said it moved Class B mall owner CBL & Associates Properties, Inc. (NYSE: CBL) due to higher near-term risk.

Select Retailers Score On Real Estate Opportunities

While the threat of e-commerce weighs down on hardline retailing, the firm noted that select retailers are taking advantage of compelling real estate opportunities. Although there has been pruning of furniture and home furnishing space, the firm sees continued expansion of many national, regional, and private retailers as a growing threat from a brick-and-mortar perspective.

Say No to Retail Software With Exposure to Brick-and-mortar

Pacific Crest recommends avoiding retail software with exposure to brick-and-mortar stores, citing the possibility of customer bankruptcy or delay in software investments. The firm sounded out the names of CommerceHub Inc (NASDAQ: CHUBA), ChannelAdvisor Corp (NYSE: ECOM) and SPS Commerce, Inc. (NASDAQ: SPSC) in this regard.

Among others, the firm said it sees slowing core retail growth at Alliance Data Systems Corporation (NYSE: ADS) as a headwind, but remains neutral as new wins and other factors could offset the negative impact. Meanwhile, the firm recommends Overweight positions in companies such as Shopify Inc (US) (NYSE: SHOP) that capitalize on the e-commerce trends and don't have exposure to brick-and-mortar.

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