by Will Ashworth | March 3, 2014 9:41 am
January’s winter storms have caused revenue shortfalls for most brick-and-mortar retailers. With reduced traffic due to poor driving conditions,people unable to make it out to the mall look to ordering online, instead.
Companies such as Amazon (AMZN) and Overstock (OSTK) should be ideally situated to cope with the weather-related issues currently plaguing the retail industry. While traditional retail has fared miserably in 2014, it’s logical that online-only retailers have performed better over the same period.
Intuitively, I have to believe this is true. But investors can’t rely on intuition alone. We need concrete facts. Pulling together as much empirical information as possible, I’ll look at whether there are any good stocks to buy when it comes to online-only retailers.
Zulily (ZU) gained 36% Tuesday after delivering its first quarterly report as a public company. The Wall Street Journal does a good job explaining why ZU stock is up 166% since its November IPO. The most important thing about Zulily’s business model is that it’s focused on busy moms who don’t have a lot of time to waltz through shopping malls looking for great buys.
In the span of a year, the number of active customers (at least one purchase annually) has doubled to 3.2 million. The revenue derived from each customer is increasing by about 10% per year. Most importantly, its customer retention is through the roof. According to its prospectus, 83% of its U.S. orders through the 12 months ended September 29, 2013, were from existing customers. Those three stats paint a very nice picture for ZU stock.
While it’s true that Zulily’s target audience are mostly women who already shop online, it’s probably equally true that poor weather in January ramped up their online purchasing. If you can’t get out and you need something, your only option is to order it online. On the downside, Zulily takes about 11 days to fulfill the average purchase due to its just-in-time inventory ordering system.
As a result, most customers likely weren’t ordering anything that was needed immediately. However, its revenue guidance for the first quarter was $225-$235 million — higher than the consensus estimate of $223 million. Some of the difference could be weather-related, but nothing material in nature.
So, should you buy ZU stock?
With the gains ZU stock has already booked combined with a valuation that is sky high, my inclination is to suggest waiting until other online-only retailers go public like Gilt Groupe and others. That gives you time to further assess the opportunity presented by flash-sale retailing. In the long-term (3-5 years), I think ZU stock will do well, but at the moment it’s priced for perfection.
Well, we know moms are. But according to the Commerce Department, sales at internet stores fell 0.6% in January, the largest decline since May 2013. More surprising is the fact that retail stores overall saw a 0.4% decline in January — 20 basis points less than online-only stores.
It’s clear the entire retail industry ran out of steam in January as customers struggled to pay holiday bills. While that’s not an unusual phenomenon, it certainly shows that weather wasn’t the only culprit.
But the cold did help a specific breed of online retailers in January — those specializing in cold-weather gear. Internet Retailer suggests consumers upped their online purchases of parkas, gloves, hats, etc., because it was too cold to go out to the stores for those items.
Summit Sports, a Michigan-based retailer of sporting goods, had this to say about the cold: “Our apparel sales are through the roof on Amazon … We’ve seen a 50% to 60% increase in sales on Amazon.” According to Compete Inc., the average weekly traffic in January for seven big-time retailers of cold-weather gear increased by 22% year-over-year. Both Columbia Sportswear (COLM) and Timberland, part of VF Corp. (VFC), saw YOY increases of more than 40%.
On this statistic alone, not to mention previous articles I’ve written about COLM stock, I’d say that the Portland-based apparel maker, although not exclusively an online retailer, is as good a stock to own if you want to benefit from the polar vortex.
So far, I’ve given a wait-and-see rating to ZU stock and a thumbs-up to COLM stock. Another omni-channel retailer that could benefit from the brutal winter we’ve been having is Williams-Sonoma (WSM). WSM stock generates about half its annual revenue from online sales, and, to a much lesser extent, catalog sales.
Although WSM stock is down almost 5% year-to-date through February 26, it has two big factors working in its favor as we move further into 2014. First, because it already generates so much of its business online, any winter storms had a smaller chance of affecting its overall business. Secondly, as the housing industry continues to recover and grow, consumers are going to want new gadgets for the kitchen.
WSM stock might be drifting downward with the rest of specialty retail at the moment, but once we get into spring and earnings are released in mid-March, I think we’ll see that WSM didn’t skip a beat in January. I like WSM stock a lot.
Spotting the winners in online-only retail is a very tricky deal because there really aren’t many publicly traded options. Beyond Amazon and eBay (EBAY), you might have a handful of names worth considering, including ZU stock. Add in the fact retailers aren’t nearly as forthcoming about their monthly sales numbers as they used to be and you have a very imprecise exercise.
In addition to the three I’ve mentioned already, you might want to consider companies like Walmart (WMT) who have huge numbers of in-store customers but also operate very large e-commerce businesses. As the snow fell in January and its customers couldn’t make the trek to the store, it’s possible many of them went online.
If you must go online-only, your truest bet is ZU stock … but be prepared for a lot of volatility. Otherwise, I’d go with COLM stock or WSM stock. And if you don’t mind paying top-dollar, Amazon’s always a good play for online retail.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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