Retail consultant HRC Advisory released a damning report recently about the poor job brick-and-mortar retailers are doing to keep up with Amazon.com, Inc. (AMZN).
In an effort to fight Amazon on the e-commerce front, they’ve hurt business at their physical store locations while also eating into operating earnings thanks to increased tech spending necessary to deliver the omni-channel experience.
It’s the perfect storm for retail stocks. Is anyone doing a good job fighting Jeff Bezos and company? I decided to find out.
To qualify for this list, a retailer has to possess two things.
First, it has to have grown operating margins between 2011 and 2015. HRC Advisory’s report found that the average retailer in its study (11 luxury chains, 4 off-price chains and 22 specialty apparel chains) saw operating earnings decline by 25% over the last four years.
Secondly, their online revenue as a percentage of total sales has to be at least 16.6%, the average of the 11 luxury and 22 specialty apparel stores.
Not an easy task.
Bottom line: Retail stocks are taking a bath — well, at least most of them are. However, two retail stocks have managed to handle the onslaught of Amazon without losing their shirts, and an honorable mention goes to a third retail stock, despite the fact that it does not actually meet the two criteria.
Can they keep it up as Amazon pushes further into retail? It’s anyone’s guess, but certainly, these two and a half retail stocks have a better shot than most.
Retail Stocks That Are Keeping Up With Amazon: American Eagle Outfitters (AEO)
CEO Jay Schottenstein owns 5.2% of American Eagle Outfitters (AEO). In Jan. 2014, Schottenstein, who was executive chairman of AEO at the time, became interim CEO after the company fired former CEO, Robert Hanson. Almost two years later, the board took the interim title off Schottenstein’s title and American Eagle was off to the races.
Schottenstein is no absentee owner. He previously held the CEO role from March 1992 through Dec. 2002, so he is very familiar with the business. And if that’s not enough, he’s also executive chairman of DSW Inc. (DSW) and owns 51% of its voting stock.
That’s part of the reason why he’s a billionaire … the other part is his ability to make things happen. Since taking over the top job in 2014, Schottenstein has been able to revive the retailer’s sagging fortunes and with it, its stock price, which had fallen as low as $10 and well below its all-time high of $34.80 back in 2007.
Of course, it helps that its Aerie brand is the hottest thing with millennials at the moment. It’s taking market share from L Brands Inc‘s (LB) Victoria Secret, and that’s showing up on the bottom line. AEO announced its Q1 results May 19 and Aerie’s sales were on fire in the quarter up 32% on a same-store basis, while Victoria’s Secret’s sales are slowing.
Aerie is certainly AEO’s growth engine, but two brands it acquired last November (Tailgate Clothing Company and Todd Snyder New York) should become a bigger piece of its overall business as the company rolls out more bricks-and-mortar locations for both brands.
I’m familiar with Todd Snyder because I get their emails promoting new and existing products. In my opinion, they have great looking stuff, and most importantly, it has been primarily built through online and wholesale business. A brand like this should do well by opening stores without affecting their other revenue streams too adversely.
Although AEO doesn’t break out its e-commerce revenues, Internet Retailer magazine estimates it generates 20% of its $3.5 billion in overall revenue. Secondly, it has grown operating margins by roughly 180 basis points to 9.1% over the last four years. Investors can expect double-digit margins on an annualized basis within the year.
Retail Stocks That Are Keeping Up With Amazon: L Brands Inc (LB)
In February, Victoria Secret’s longtime CEO Sharen Turney left the company, forcing LB founder and CEO Les Wexner to step into the job on a temporary basis. It didn’t take long for Wexner to fill the job, announcing May 20 that it had hired Jan Singer as the new CEO at Victoria’s Secret.
Singer was most recently CEO of Spanx. Before that, she spent 10 years at Nike Inc (NKE), where she was in charge of its apparel arm, and before that, its global footwear business. Problem solved. Wexner can go back to taking care of L Brands’ future.
Although Victoria’s Secret is the company’s big revenue generator, controlling 60% of the U.S. lingerie market, it’s not without its problems.
In addition to announcing Singer’s hiring, LB also announced that it’s getting out of swimwear and cutting back the number of categories it participates in, so that it can focus on its bra business. It also cut adjusted earnings guidance for 2016 from $3.90 to $4.10 per share to $3.60 to $3.80. Competition is getting intense.
But, if anyone can handle the competitive landscape, it’s Wexner.
In the last four years, L Brands’ operating margins went from 11.9% in 2011 to 18% in 2016. As for its online revenue, its direct business managed to generate $1.9 billion in 2015; 17% of the revenue LB generates from Victoria’s Secret and Bath & Body Works, its two main brands.
Retail Stocks That Are Keeping Up With Amazon: Home Depot Inc (HD)
Let me say upfront that the honorable mention goes to home improvement retailer Home Depot Inc (HD).
It has managed to build a significant online presence despite selling a bunch of products that aren’t exactly easy to ship. In fact, it managed to grow its online revenue by 40% annually between 2010 and 2014. That’s no small feat.
In fiscal 2015, it had more than 1.4 billion visits to its websites and a 25% increase in online sales — 40% of which were picked up at a store, saving Home Depot a significant amount of money and time. Together, this all added up to $4.6 billion in online revenue in fiscal 2015, representing 5.3% of its $88.5 billion in total revenue.
While 5.3% isn’t anywhere near the 17% required to make the list, it is an impressive showing for a home improvement retailer. And this hard work has paid off on the bottom line. Over the last four years, Home Depot’s operating margins have grown by 470 basis points to 13.3% — a return that puts AEO to shame.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
