The economic uncertainty caused by the corona virus has clouded the outlook for many sectors of the economy. This includes retailers who end up in the direct line of fire if this global disease forces consumers to stay at home and limit their spending.
But not all retailers face the same risk: while the US toy industry is expected to be the hardest hit, with over 85% of their products made in China, some large ones will Food-oriented retailers are likely to escape the worst of the fall-out.
And the Federal Reserve stepped in yesterday to help limit the extent of the damage, by applying an emergency reduction to prevent a global recession, as the virus controls economic activity in China and the rest of the world. world keeps pressing.
According to analysts, the US retail trade will be hit by both demand and supply chain problems as the virus travels to more states. Cowen analysts wrote in a note this week:
"Declining consumer confidence, potentially serious declines in store traffic and temporary store closures are evolving risk factors that depend on uncertain variables such as the geographical spread of the virus and the timing of containment / eradication solutions."
One Bright Spot
Although the situation remains very fluid as economists struggle to understand the damage that this spreading disease could cause in the coming days and weeks, this aggressive monetary measure from the US Federal Reserve offers a bright spot for retailers.
The central bank yesterday had its main benchmark rates with 50 basis points to help businesses and consumers while the US economy was hit. The relaxed monetary conditions of the past decade led to unprecedented growth in retail spending, allowing retailers to increase their profitability.
If not immediately, interest rate cuts will be net positive for retail stocks, especially for grocers and larger chains such as Walmart (NYSE :), Target (NYSE 🙂 and Home Depot (NYSE :), which are better placed than smaller players to withstand the economic shock.
Weekly price card from Walmart
Looking at the prices of their shares since the outbreak of the corona virus, it is abundantly clear that these companies outperform the broader market and that some investors are seeking refuge.
For example, Walmart and Costco Wholesale (NASDAQ 🙂 shares perform better in this sale than other retailers. They have increased by 1% and 2% respectively in the last month, when they have lost around 5%.
Costco Weekly Price Chart
The retailers who may not be doing well in this health crisis are those who rely on clothing and do not sell groceries. A widespread coronavirus outbreak can also lower demand in department store chains such as Kohls (NYSE 🙂 or Nordstrom (NYSE :).
The major US retailers, including Walmart, are considered defensive because these companies recover quickly after an initial shock due to the nature of their business. Walmart & # 39; s large store network, enormous power to squeeze its suppliers and fast-improving online sales give it the status of a safe haven. A factor that favors this retailer over others is its strong food-related revenue. This makes it better isolated from coronavirus-related disruptions than many competitors because food is mostly from North America.
With this strong market position, the ability of investors to provide regular cash is more important. Walmart also has a fantastic track record in this area. Since the payment of its first dividend in March 1974, Walmart has increased the payment every year and now offers an annual dividend of $ 2.16 for a return of 1.86%.
Bottom Line
It is hard to imagine that retail stocks will not feel the impact of the rapid spread of coronavirus in the US. Consumers will certainly reduce the number of visits to stores and, in the event of an economic slowdown, also their spending. But major grocers, including Walmart and Costco, offer solid revenue potential and a good hedge if the economy slows down or ends up in a recession.
