3 retail businesses with staying power

The ability for consumers to buy discretionary items online without leaving their homes — known colloquially as “the Amazon effect” — is impacting the bottom line for traditional retailers.

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But, there are three types of brick-and-mortar retail businesses that can withstand the digital shift, says Peter Hardy, vice-president and client portfolio manager at American Century Investments in Kansas City, Missouri. His firm manages the Renaissance U.S. Equity Income Fund.

The first retail group that he likes “are niche-oriented business models like Lowe’s and Home Depot; those companies are doing well in the current environment due to the home improvement cycle. [And] as of yet, you can’t buy a two-by-four or a sheet of plywood effectively over the Internet.”

The next group that will prosper are “niche-oriented businesses that require some sort of timeliness, like Advance Auto Parts.” He likes Advance because when someone’s car breaks down, “the need for an auto part […] is there, and the ability to get that part in a timely fashion is what drives their business.”

The last category Hardy gravitates toward is discount retailers. “Consumers now can price check everything, so the discount retailers or businesses that have discounting as part of their core concept are likely not to be impaired by the Internet.”

Still, major retailers like Walmart and Target are also successfully meeting consumers’ changing needs. “Their ability to compete with Amazon from an Internet and distribution perspective on a longer-term basis is good, and the transition to having groceries in the store will create ongoing traffic to their stores.”

Hardy says he and his firm have “gravitated to some of those discretionary names. Walmart is not in the consumer discretionary sector, but we consider it a retailer, so that would be a big holding for us.”