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A handful of industries and companies are defying the downturn in retail as consumers move online to buy things.
They don’t include apparel retailers like Macy’s and TJX, which disappointed on first-quarter earnings. But Walmart, America’s largest brick-and-mortar retailer, proved resilient partly because it invested heavily in beefing up its online operation, including with its $3 billion acquisition of Jet.com.
The e-commerce threat is a common thread for many of the companies that are likely to close stores – more than 3,000 closings are expected this year – and in turn lay off workers.
But the changes in behavior that have slammed some of the big players in traditional retail could boost other parts of the consumer discretionary sector.
“Headwinds remain for some particular industries (autos, publishing, some retailers) within discretionary, but we are cautiously optimistic that the overall group should continue to move higher, possibly at a slower rate near-term,” Lindsey Bell, an investment strategist at CFRA, said in a recent note.
“Stock pickers, however, will likely benefit the most.”
Some recent surveys, conducted by firms including TD Bank and JPMorgan Chase, found that millennials are spending more on experiences. For Sebastian Werner, a portfolio manager for US and global growth equities at Deutsche Asset Management, companies that offer experiences over items are likely to outperform in this environment.
The beauty industry is doing fairly well, Werner said. He gave Ulta Beauty as an example that combines physical cosmetics sales with the experience of a makeover. Its shares have gained 42% over the past year.
Werner and other investors have pointed to home improvement as another niche that’s withstanding the broader weakness in retail. Floor & Decor, which went public in late April and has gained 13% since then, is “proof that this is a retail concept that might work in an environment that doesn’t have the overhang from Amazon,” Werner said.
That’s because of the “touch-and-feel” nature of tiles and other home-improvement supplies. Buyers also often prefer to get in-person advice from a professional at a store.
Those trends also put gardening retailers in a good spot in this market environment. “If you’re working on your garden now, you don’t want to wait until the UPS car drives to your home in two days,” Werner said. “You just drive to the store.”
Tractor Supply is one of Werner’s preferred companies in this space, though its exposure to oil-producing markets has hurt its performance as the commodity’s price fell and workers lost their jobs.
Another area that stands to benefit from consumers spending more on experiences is travel, specifically cruise lines, Werner told Business Insider. “Most people that have gone on a cruise don’t do it only once, but they become repetitive users,” he said. “They get hooked on the experience, usually.”
He said cruise lines were smart about ways to upsell customers with upgrades like a room with a sea view.
China’s booming cruise industry also offers opportunities for investors, as well as the recent opening up of Cuba for tourists. Though Cuba still needs to upgrade its infrastructure, it offers opportunities for investors who are looking out to the long term, Werner said.
To be involved in consumer discretionary, “you need some concepts that are somewhat differentiated and that are isolated by this e-commerce thing,” Werner added.