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Big-Box Retail Fights for Its Share of Online Holiday Spending

Walmart, Target and Best Buy just need to show progress online

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E-commerce is the expected star of what analysts anticipate to be a pretty good holiday spending season, and any online operation not named Amazon (AMZN) is going to be desperate to get its share.

Although big-name retailers such as Walmart (WMT), Target (TGT) and Best Buy (BBY) have plowed billion of dollars into their e-commerce business over the last few years, they’ll never catch up to Amazon. But that doesn’t mean they can let AMZN pad its lead unopposed.

After all, online retail sales are in a secular period of accelerating growth. Large chains can’t afford to fall farther behind if they hope to make e-commerce a significant contributor to results.

Online sales still account for only about 7.2% of all retail spending, but they’re increasing at a steep and relentless pace. In the U.S. alone, e-commerce sales grow about 15% year-over-year every quarter. Total sales growth, meanwhile, is poking along at around 4%.

BBY Stock: A Cautionary Tale

To get a sense of how critical e-commerce is, look no farther than Best Buy.

Best Buy was once left for dead, but its online operations are helping it to get back on its feet. Like most consumer electronics chains, price pressure from Amazon threatened to make BBY extinct. Granted, the retailer is hardly free and clear, but e-commerce sales are leading it in the right direction.

In the August quarter, BBY’s online sales grew 17% year-over-year and were responsible for all of the company’s top-line growth in the period. Total revenue rose by $69 million year-over-year, but web sales blew that away, growing by $95 million vs. the year-ago period.

As a result, online sales as a percentage of BBY total revenue increased to 8.6% in the fiscal second quarter from 7.7% a year ago.

E-commerce is going to be critical if Best Buy hopes to avoid a repeat of last year’s sour holiday spending season. As a margin-booster and bulwark against show-rooming, e-commerce could be the difference for BBY in the final quarter of the year.

Holiday Spending Is Just the Tip of the Retail Spear

Behemoths like Walmart and Target don’t need their online commerce to grow as desperately as Best Buy does, but they both know which way retail is going. It’s fair to say the stock market does, too. AMZN has been absolutely crushing TGT, WMT and the broader market for years now.

Since the bull market began in early 2009, WMT stock is up about 18%, TGT gained 155% and the S&P 500 has returned 170% on a price basis.

As for AMZN? It’s up 900%. Online is where the outsized growth is when it comes to retail, and investors know it.

The big-box retail chains came to this realization only in the last few years, so they have a lot of catching up to do. Both WMT and TGT are plowing billions into their e-commerce businesses and seeing at least some progress, but keep in mind the ceiling is probably on the lower side for these names.

Online sales account for about 7% of WMT’s total revenue but its has unique hurdles to overcome in this race. Groceries account for more than half of total sales, and that’s an area in which consumers are less than enthused about ordering online. It also hurts that WMT’s core customers aren’t the most wired or Internet-dependent shoppers.

TGT, meanwhile, derives most of its sales from online-friendly goods such as apparel and household items. That, among other efforts like its investment in all-important mobile shopping, have TGT blasting past WMT’s e-commerce growth rate.

The company said online sales rose 30% in 2015. That’s essentially doubled the growth rate of total U.S. sales. The growing contribution of online sales has helped TGT post higher gross margins for three consecutive quarters. If holiday spending comes in as forecast, TGT should be able to keep the streak alive.

Progress, Not Perfection

E-commerce is hardly going to make or break TGT or WMT this holiday spending season; it’s simply not big enough pieces of their revenue pies. But the companies do need to show that they are making strides.

In TGT’s case, the market will certainly be happy to see the retailer make progress with e-commerce this holiday spending period, but it won’t be crucial to sentiment on TGT stock.

As for WMT, it has much bigger problems than online sales. Sluggish global economic growth, a strong dollar and core customers who remain financially pressured are what’s really ailing Walmart these days.

Amazon is remaking the retail sales landscape and will derive the biggest benefits from accelerating growth in online holiday spending this year, but there’s still enough action to go around. As long as brick-and-mortar names can maintain momentum with their own e-commerce endeavors, there’s no reason to worry about their fortunes.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

2015 Holiday Spending Superguide


Article printed from InvestorPlace Media, https://investorplace.com/2015/11/holiday-spending-tgt-amzn-bby-wmt/.

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