Online retail will see an 'acceleration' post-virus: Strategist

A deluge of retail earnings will be in focus in the week ahead. ProShares Global Investment Strategist Simeon Hyman joins Yahoo Finance’s On The Move panel to break down retail’s big week.

Video Transcript

JULIE HYMAN: Let's get some perspective here. Simeon Hyman is joining us now. He is ProShare's Global Investment Strategist. He's joining us from New York. So Simeon, you guys have several products that track the retail industry in terms of various ETFs.

And obviously, we've seen sort of a tale of two cities this year thus far when it comes to the retailers. But we've got the biggies reporting this week, with the Walmart's and Target's of the world. What does the backdrop look like for them? I mean, they're helped by selling essential stuff.

SIMEON HYMAN: That's really the breakdown. So in addition to the big week of retail earnings, we also have the e-commerce report tomorrow. And that's big news too. So we saw a hint at that from retail sales last week. We saw actually around an 8 and 1/2% increase in non-store retail versus the 16% decline in overall retail. We get a lot more detail from e-commerce.

But you know, so the two things that are happening right now in the lockdown are, clearly, the online players are having a field day. And much of brick and mortar is shut down. But of course, that's kind of putting gasoline on a fire that's been burning for a long, long time. Online retail has been growing four to six times as fast as brick and mortar, even though it was only up to about 12% of sales at the end of the year.

Now, within the retail space, the staples versus discretionary piece-- and you used the term "essentials"-- that's a key distinction too. So in our ETF C-L-I-X, CLIX, we have a long leg that tracks the online retailers and then the short leg, which tracks the brick and mortar retailers.

On the brick and mortar side, what we find is the small group of staples folks, to your point, have actually outperformed in the pandemic. But the vast majority of the space that's in the discretionary space has been completely in the toilet, to be-- to be very frank about it. And many of them are having problems in any event. So we're seeing the bankruptcies-- JCPenney, Neiman Marcus, Pier 1, J. Crew. And they're likely to continue.

ADAM SHAPIRO: Simeon, when we start to get this report tomorrow, there's an old metric that e-commerce was around 11% of total retail sales. Coronavirus, obviously, is accelerating all kinds of things. How much of an acceleration are we going to see? Let's get past a vaccine. What percentage of retail sales are going to be [INAUDIBLE]?

SIMEON HYMAN: Yeah, I think you almost have to ignore the pandemic, period. But I think there will be an acceleration. In other words, if you look at most of the forecasts out there, they have us going to 20%, 25% online in two or three years. There will likely be an acceleration.

And I'll give you an example of one of the sources of that coming out of the pandemic. The lowest penetrated piece of retail from an online perspective was groceries, only 3% at the end of the year. And that-- of course, we've all been getting groceries delivered in the pandemic. So I think the comfort around that has gone up. So you're surely going to see an acceleration of a trend that was already well in hand.

Interestingly enough, when you look at Amazon's earnings, one of the things that was a little bit of a ding against them was the extra cost of the extra grocery. That's a little bit lower margin. So as part of the evolution, you're going to be seeing the online folks start to get some scale in places where they didn't have as much penetration. So you know, what held them back to only an 11% increase since the middle of February will likely become a better source of revenue as they get more scale in grocery.

- Simeon, I just want to kind of ask where you think we'll start to see recoveries for retailers, brick and mortar, as we start to reopen various states and cities. Do you think there's one particular type of retailer that will do especially well-- outside of, obviously, grocery stores, which have remained open?

SIMEON HYMAN: Look, everything that was shuttered is going to get a bounce when it gets to open. I mean, even with the word of a potential vaccine-- as we speak today, there is a rally in the brick and mortar stocks. I think it will be short-lived, but I do think it will be across the board. Because once we get past just that bounce of, the stores are open again, we're going back to the dismal environment that's been going on for many, many years.

RICK NEWMAN: Hey, Simeon. Rick Newman here. So some states are reopening. Retailers are reopening. Have you heard any interesting ideas for how they can get sales up, even if they have to limit the amount, the number of people in the stores? You know, 25% of capacity, 50% of capacity. What can they do to get sales up even if they have to let fewer people in?

SIMEON HYMAN: You know, it's interesting. I haven't heard anything specific, but I think what makes logical sense is the-- the players that get omnichannel right-- and this is a great test of that-- that will be really important. Because if you can't quite get the full capacity through the store, it's almost like a showroom operation. You can't service everybody.

But if you're able to do that omnichannel thing right-- and a few folks will get it right. It's one of the reasons why, in our brick and mortar index, we actually equally weight the players, because a few folks will get it right. Or in a pandemic, a couple of the grocery stores will do well, even though, frankly, most won't do that well. But I think those that have a better integration of their off- and online presences will be able to leverage more limited capacity in their store and have that be more of an upside.

JULIE HYMAN: So Simeon, I was going to then go to strategy and what [INAUDIBLE] should be looking to buy then as we sort of enter this next phase of reopening and even beyond. It sounds like, you know, you think that secular trend of e-commerce penetration and companies that are executing that well, that's going to do well no matter what happens with reopenings, et cetera.

SIMEON HYMAN: Yeah, that's exactly right. I mean, we have two ways to execute this. CLIX, which I mentioned, is our long online short brick and mortar. And then we also have ONLN, which is the long only online piece. And even though the long only side is not just Amazon-- it's also players like Chewy and eBay and Etsy and Wayfair.

Look, if you're a trader and you want to try to time this opening, good luck. Try it. I mean, it's rallying today. But if your horizon is anything more than weeks, and it's into quarters in the next couple of years, then I think you really have to be on the side of the continued growth of online at the expense of brick and mortar.

JULIE HYMAN: Yeah, I think the message almost always with timing the market is, good luck with that. So Simeon, point well taken. Simeon Hyman is ProShare's Global Investment Strategist. Thanks for joining us with some perspective on those big retail earnings and longer-term trends as well.