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Quarter-End Insights

Consumer Cyclical: Tepid Mall Traffic Could Constrain the All-Important Holiday Season

Retailers realize foot traffic is declining, but reactions have largely failed to return performance to historical growth levels.

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  • Consumer cyclical sector valuations declined slightly this quarter, with a weighted average price/fair value ratio of 0.98, coming in behind last quarter's 1.01. We attribute this decline to fears regarding Amazon's (AMZN) capability to disrupt a number of retail industries.
  • Moving into the fourth quarter, we think attention will shift to holiday traffic in brick-and-mortar locations. Past trends have not been strong, with brick-and-mortar net in-store sales dropping 5% and the number of transactions falling almost 8% over both Thanksgiving and Black Friday in 2016, according to RetailNext.
  • We believe the U.S. retail category may be overstored because of disruptive e-commerce forces. According to data from icsc.org, a shopping-center trade group, the United States has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia, the next-highest countries.
  • That said, we believe there are a handful of traditional retailers offering some combination of product specialization, convenience, and experience that have been excessively punished by the market.

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Bridget Weishaar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.