Bricks and Mortar Died. Where Did It Go?

NEW YORK (TheStreet) -- The fourth quarter of 2013 has not been kind for many retail stocks. Promotions pressured companies during the holiday season, a time when many retailers make a large portion of their annual sales. 

Some traditional retailers slipped by unscathed, but many did not. As a result, their share prices are getting shellacked when they report earnings or issue negative preannouncements. 

"Promotional, promotional, promotional." It's all we've heard since December in regard to the retail sector. Analysts knew it, the companies knew and we knew it. 

So why didn't investors prepare for such a disaster? I don't know. Perhaps the broader stock market's outperformance reassured them. Or perhaps it was the correct sense that the economy and the consumer are still intact.

What I do know is why the traditional retailers are getting hurt.

The tides have officially turned in favor of online shopping following the 2013 holiday season, as  Amazon ( AMZN) has become the go-to place for shopping. 

The company sold 37 million items on Cyber Monday, a 44% surge from the year before. On Black Friday, sales for the online retailer rose 35% year over year. eBay's (EBAY) sales increased 32% year over year on Cyber Monday, and 39% on Black Friday.

Amazon's sales from Thanksgiving through the third week in December were up 25% year over year, while eBay's were up nearly 10%. 

In general, online sales were on the rise, and specifically, mobile sales have at last seemed to increase in a meaningful way. The Friday-through-Sunday weekend before Christmas makes up three of the four top shopping days in the U.S. (the other being Black Friday). 

According to the Wall Street Journal, in 2013 online sales increased 37% year-over-year that weekend, while mobile sales increased 53% and accounted for 21.5% of all online sales. However, during that same period, in-store sales fell 3.1%, and store traffic dropped 21%.

Shares of Best Buy (BBY) were knocked down 30% last Thursday and continued lower for several trading sessions. Sticking out through the falling same-stores sales and shrinking margins, was one bright spot: The company's online sales jumped 23.5% during the holiday season. 

This isn't a fluke, people! The numbers I cited above are evidence that online sales will continue to thrive while traditional bricks-and-mortar retailers continue to suffer.

Of course, this broad trend is nothing new. Online sales have been growing over the past several years. But they went from steady growth to rapid growth in the blink of an eye this past holiday season.

Starbucks SBUX CEO Howard Schultz summed things up well on his company's conference call this week: "Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way."

So how can a traditional store, which is located in a traditional mall with traditional advertising, keep up?

It probably can't. The Sears Holdings (SHLD) and J.C. Penney's (JCP) of the world are disappearing into the abyss. There will be others.

Of course, traditional retailers won't completely die away. Sometimes it's better to go into a store and actually feel a product, to hold it your hands. But for a large majority of things -- things like video games, toy sets and movies -- the shift to online purchasing is happening at a rapid pace. No one needs to feel those. 

Some retailers, such as TJX Companies (TJX) and Costco Wholesale (COST) will continue to do well. They offer unique products and appeal to specific customers. 

Even as traditional companies begin to focus on online sales -- and they will -- how will they undercut Amazon on price? Service, shipping time and customer satisfaction won't be easy to beat either. 

As Amazon's web of services continues to expand into wholesale selling (like a Costco or Sam's Club) and fresh food deliveries, what are the Wal-Mart's (WMT), Best Buy's and Bed Bath & Beyond's (BBBY) of the world going to do? 

Much like the secular trend of consumers switching to electronic payments (credit and debit) and moving away from cash and check, a similar trend in how they're shopping is playing out too. But like I said, this time it's different. It's like online shopping has always been a pest to the big-time retailer, the "little brother." But all of sudden, that online growth has increased in a more meaningful way.

So don't expect online sales to slow. Instead, identify which companies will benefit the most. Right now, they include Amazon. Google (GOOG) is also a winner. So are the retailers that don't live and die by the traditional store, companies such as Nike (NKE) and Under Armour (UA), for example. These types of retailers will actually benefit from the online takeover. Sales of their products will continue to grow whether they're ordered through Amazon or purchased at Macy's  (M). 

In order to rebound, traditional retailers will need to quickly build an e-commerce infrastructure, convince customers that they are the better choice over Amazon.

At the time of publication, the author was long SBUX.

-- Written by Bret Kenwell in Petoskey, Mich.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.

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