The Areas of Retail with the Most Upside from a Cyclical Perspective


  • The retail sector as a whole has recovered significantly from the Great Recession and is hitting new highs
  • Home-related sectors were the hardest hit during the recession and still have significant upside just to return to their prior normalized level
  • Other depressed sectors include electronics and appliances, sporting goods, and men's clothing
  • Be careful of structurally depressed sectors, which may never fully recover

The Details:

During the Great Recession, just about every area of the economy became cyclically depressed. Five years later, most areas have recovered from those depressed levels and are now hitting new highs. But which areas have yet to pull themselves out of the recessionary crater, and have further upside in returning to normalized levels?

I took a closer look at Census Bureau's retail sales data to figure this out. The Census Bureau data covers many different sectors of the economy and is released on a monthly basis. The data comes directly from some of the largest retailers in the country, and is statistically significant. I looked at each sector's current levels and compared that to the prior peak achieved over the last decade. Below is a list of the sectors that are furthest away from the prior peak:

Next, I removed sectors that were structurally depressed. For example, book stores are clearly on the decline and a strong case can be made that they won't ever return to their prior levels due to eBooks and other factors. A similar case can be made for office supplies (with the digitization of the office and declining usage of paper), or for department stores (which have been taken apart by specialty stores). What are we left with?

Mostly home-related retailers! And a few others, including men's clothing stores and electronic stores. The recession was not kind to the housing sector of the economy, and that sector continues to recover despite several years of strong growth. This is a strong argument for why companies like Bed Bath and Beyond, Lowe's, and Restoration Hardware still have significant upside despite several strong years of results.

For electronics stores, one could argue that they have also been disrupted by the online channel (think Amazon) and by Apple, which would mean that they might not ever return to prior levels of activity. However, I've decided to keep this sector in as appliances have been a strong category over the last several years, and many retailers have moved to expand their appliance selection for this reason. With current levels still 6% below their prior peak, there may be more upside left for the category to grow.

The chart below shows just how far some of these categories still have left to grow. While furniture retailers like Restoration Hardware have been on a tear over the last several years, the category remains 14% below their prior peak activity achieved in 2006.