A 'Layer Of Protection' From Amazon Is A Dividing Line In Retail

Retailers have shown greater capital discipline in the hopes of re-invigorating their businesses, but investors must take a cautious stance on the sector, according to Morgan Stanley.  

The Analysts

A team of Morgan Stanley analysts led by Simeon Gutman and Kimberly Greenberger reviewed the retail sector.

The Thesis

The retail sector continues to show signs of struggling with one of the most telling metrics, the analysts said in a Thursday report: EBIT margins.

Since 2012, retailer EBIT margins have compressed 230 basis points on average due to the following reasons, Gutman and Greenberger said: 

• E-commerce platforms stealing "significant" market share.
• Increasing price transparency.
• A sales shift toward online retail.
• Incremental costs associated with free shipping offers.

Returns on invested capital fell 150 basis points over the same time period, as many companies took advantage of stock buyback programs and slowed their store growth, the analysts said. A closer look at different retail subcategories shows stronger results from companies with some insulation from e-commerce, according to Morgan Stanley. 

Those with a "layer of protection" from Amazon.com, Inc. AMZN — such as Home Depot Inc HD — expanded their EBIT margins by 150 basis points as a group over the years, with a 420-basis point expansion in ROIC.

On the other hand, retailers that more closely compete with Amazon, such as Pier 1 Imports Inc PIR, have shown an EBIT margin erosion of 420 basis points on average and 370 basis points of ROIC contraction, the analysts said. 

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