Black Friday, the day after Thanksgiving, was once the start of the Christmas selling season, and the day when retailers finally turned profitable for the year, their results “going into the black.”
Now it’s more of a half-time whistle.
That’s because Christmas in the 21st century means more than a few presents under a tree. It is also a time that tests the loyalty of sales channels, a time to measure underlying trends in the retail space.
Throughout this century, that trend has been e-commerce. Whether your investments are driving it or responding to it, online sales today are the key to retail success. Call it “omni-channel,” or “clicks and bricks,” but a company’s e-tailing is often where they make the big bucks.
For investors, this has made the answer clear. Buy Amazon.com, Inc. (NASDAQ:AMZN) and get on the right side of the trend. If you did that at the company’s dot-com bubble peak, in 1999, you’ve made 1,000% on your money, even though you were underwater until 2009.
But what if you’re investing new money today? The rest of the retail space has now responded to Amazon, but their stock prices have not. There may be bargains out there.
Each of the following retailers will be matched against Amazon, and each other, over the next month. The most important point for investors to remember here is that this is an expectations game. A poorly run company can beat expectations more easily than a well-run company. Those retailers which beat expectations will see big gains for their investors. Those who don’t will cost you money in 2017, when expectations will be reset.
So, are you ready to go stock shopping? Bring your credit card and a finger. Clothes and shoes are optional.
Retail Stocks to Watch for Black Friday: Amazon (AMZN)
Amazon is the 800-pound gorilla this Christmas.
This means investors have 800-pound-gorilla-sized expectations. Failure to meet them hammered the stock after its third-fiscal-quarter earnings came out in October, as it lost almost $40 per share overnight after earning earn $252 million on revenues of $32.7 billion. For January, analysts are expecting something truly spectacular according to EarningsWhispers — $1.63 per share of earnings on $44.7 billion in revenue.
To put that in perspective, last Christmas (a record quarter), Amazon earned $482 million on revenues of $35.75 billion. Analysts now expect the company to do 20% better on the top line, and 60% better on the bottom line, to justify a price of $777 per share.
The number Amazon management will be looking at most closely is operating cash flow, which came to nearly $12 billion last Christmas. Amazon plows that cash right back into the business, with $1.7 billion in capital expenditures during the second quarter of this year alone. Amazon’s willingness to reinvest all its cash has always been fuel for the bears, who complain about how the company “doesn’t make any money” and doesn’t pay a dividend.
The bears have watched the stock rise nearly 260% over the last five years.
Christmas is when Amazon’s spending comes back in the form of revenue. Planes, warehouses, data centers and robots allow Amazon to make money not only for itself, but for others. If small businesses have an e-tailing plan this Christmas, it probably revolves around Amazon. Over 85% of the companies allowing Amazon to fulfill their holiday orders bring in under $1 million, and almost one-quarter have no other sales channel.
Amazon is keeping the U.S. Postal Service in business as well, with 40% of its U.S. packages going through that channel, twice the volume that goes out through United Parcel Service, Inc. (NYSE:UPS), the second-leading delivery agent. It’s why I sometimes see my postman on Sunday, even while they’re trying to end regular Saturday delivery.
This holiday season, Amazon is also hiring 120,000 temporary workers to fill those trucks.
Still, it is hard to see how fast, or how far, Amazon shares can go from here. The company’s stock is selling for almost three times annual sales, even assuming it meets expectations, when most retailers sell for half their sales or less. The price-to-earnings multiple of 174 is more than six times that of Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOGL). Bears are lying in wait, and could eat their fill once the earnings come out, as they did after its outstanding third-quarter results were announced.
Retail Stocks to Watch for Black Friday: Walmart (WMT)
Wal-Mart Stores, Inc. (NYSE:WMT) was Amazon before Amazon existed. By using mainframes and barcodes, Walmart connected stores directly to supply chains in the 20th century, delivering big-city value to small towns and becoming the world’s largest retailer by sales.
Walmart is still many times larger than Amazon. Its sales for the quarter ending in July, $120.8 billion, were still larger than Amazon’s sales for all of 2015, $107 billion. But the gap is narrowing between these two retail stocks. In 2012 Walmart’s quarterly sales were more than twice those Amazon achieved for the year.
Walmart has made repeated efforts to outgrow Amazon in ecommerce, so far without success.
In 2014 Walmart said it would raise the online unit’s budget 50%. It took an earnings hit on those investments in 2015 but still made only limited progress in the market as CEO Doug McMillon talked in April about “seamless shopping,” integrating stores with the company’s website.
Even as he spoke optimistically about the past, however, McMillon was preparing to change direction, calling the 7% growth rate in ecommerce during 2015 “too slow.” Thus Walmart sold its Chinese e-commerce operations for a stake in JD.Com Inc(ADR) (NASDAQ:JD), becoming the Chinese company’s preferred merchant. Then, in August, it spent $3 billion on Jet.com, which a few months earlier had only been hoping to achieve $1 billion in sales this year.
Now it’s shaking up its ecommerce arm, putting Jet executives in key positions. Jet co-founder Marc Lore, who previously sold Diapers.com and Soap.com to Amazon, is now in charge.
Jet is known for giving shoppers increased discounts as their orders get bigger, for its JetCash incentive program that delivers discounts at other e-tail shops and for operating in wholesale as well as retail markets. Already, the Walmart.com page is looking more Jet-like, and Christmas specials were already running on Nov. 3.
Amazon has beaten Walmart’s low-price strategy with Amazon Prime shipping, it has better relations with small merchants and its network of warehouses and cloud computing centers are still superior. But if Lore can turn regular Walmart shoppers into loyal Walmart.com shoppers, he will have begun a turnaround.
If Walmart’s online growth rate can match Amazon’s, just in merchandise, Lore will have turned the $3 billion paid for Jet into one of the year’s best bargains.
If he can’t, however, Walmart will just try something — and someone — else for a Black Friday win.
Retail Stocks to Watch for Black Friday: Target (TGT)
In changing his direction in e-commerce, McMillon may have been less upset over falling further behind Amazon as Black Friday 2016 looms, and more worried about what was coming up behind Walmart in the form of long-time rival Target Corporation (NYSE:TGT).
Target had a better online Christmas than Walmart did last year, growing sales 34%, which represented two-thirds of the chain’s total growth. Target did a better job fulfilling online orders from its stores, with stores filling about one-third of those orders.
But Target found itself in the position of a small-market sports team that won a championship and watched its big-market rivals then outspend it in the free agent market. Growth began slowing and the company admitted its back-end systems were not keeping pace.
In response, it has launched a new franchise within the company code-named Goldfish, looking for people with a “deep understanding of the fundamentals of retail marketplaces, social commerce and influencer networks.” While Walmart killed its small-format store efforts to focus on e-commerce, Target is doubling-down on small stores in urban areas that can, like its bigger suburban locations, be integrated with its online efforts.
This Christmas, Target will be offering what it calls “curated experiences” — products hand-picked based on past shopping experience — as well as “subscription” discounts on items shoppers buy regularly and a same-day delivery alliance with Instacart that can get products to shoppers within a few hours in major cities.
The company is also offering free shipping on Christmas orders and emphasizing “value” in most of its ads, with exclusive merchandise like a new Garth Brooks CD collection, and a new children’s clothing line dubbed Cat & Jack, which the company hopes to build into a $1 billion business.
If Walmart is like the old New York Yankees — constantly changing managers and players in hopes of building a winner — Target CEO Brian Cornell is more like the Kansas City Royals, working on a multiyear plan that will nurture a long-term culture of winning.
The playoffs, in this case, start on Black Friday.
Retail Stocks to Watch for Black Friday: Costco (COST)
Costco Wholesale Corporation (NASDAQ:COST) has, for the most part, ignored the e-commerce revolution. If Amazon is an 800-pound gorilla, Costco might be symbolized by a sleeping elephant. It’s doing fine now but, if this Christmas goes against it, it may wake up.
There is a Costco.com, but for the most part it focuses on products like furniture that need to be delivered, while also pushing services like its travel agency, payment processing or insurance programs that businesses might take advantage of.
As the warehouse club’s growth rate continues to slow — revenues grew by $7.5 billion in 2014 but only $2.5 billion for the fiscal year ending in August — critics have begun to appear.
The excuse that Costco is a warehouse that sells vast quantities and thus doesn’t need an e-commerce strategy is belied by the fact that rival Walmart’s Sam’s Club warehouses now have a good one, a service called Club Pickup that lets business customers maintain shopping lists online and spend almost no time in the store.
While the company’s site is still ranked No. 8 on InternetRetailer’s list of top shopping sites, the fact that its customers are now older than the U.S. median and the problem of people “never wanting to leave their house and only typing stuff to order and get it at the front door,” in the words of Chief Financial Officer Richard Galanti, are starting to get some attention.
But there are green shoots. Costco was the top TMall seller at last year’s “Singles Day” event held by Alibaba Group Holding Ltd. (NASDAQ:BABA), moving $3.14 million worth of merchandise in one hour. Its online sales were up 19% year-over-year during the third quarter of its 2016 fiscal year, which ended in May.
Galanti, however, seems to be alone in raising the alarm about Costco’s ecommerce problems. If it wants a direction, it can do what Walmart has done buying Jet.Com, and make a move for Boxed Wholesale, a site for “Costco-sized orders” that recently got $100 million in new funding.
Costco is moving, it’s just moving slowly. It is studying the problems of urban delivery through the University of Washington. It has increased its capital budget substantially and some of that money is going into its ecommerce efforts.
But its “meh” attitude toward ecommerce is drawing increasing scorn from analysts. If the company’s 90% renewal rate on memberships starts to slip — its profit and membership income track closely — the voice of Galanti, a Costco lifer, is going to be heard.
Retail Stocks to Watch for Black Friday: Macy’s (M)
Will the last person to leave the shopping mall please turn out the lights?
That’s the stock market’s assumption about shopping malls, the post-war avatars of American prosperity and now, it would seem, mostly empty parking lots looking to be recycled.
No company epitomizes this change of attitude more than Macy’s Inc (NYSE:M). The one-time Federated Department Stores, a roll-up of local department store chains based in Cincinnati, was very much in vogue during the last decade, when it put the Macy’s name on most of its units (some upscale outlets are still called Bloomingdale’s) and traded at over $78 per share.
But after achieving a second peak of $72 per share in the summer of 2015 the company’s shares collapsed, and now trade at half that level despite a 38-cent-per-share quarterly dividend yielding over 4%. Investors just don’t see that dividend as sustainable.
The problem is not the company’s e-commerce strategy, which continued to post double-digit growth early this year even as overall sales fell. The site offers free shipping on purchases over $50, and “Macy’s Money” promotions to regular customers.
The problem is the stores. Fewer people are going to them. Their reputation for service makes them a “full price” retailer. Price-oriented shoppers associate less service with better value.
Macy’s responded to its poor 2015 with a full-fledged retreat. It is closing 100 of its 750 stores, part of a general industry retreat that is also impacting the malls for which Macy’s was long seen as an “anchor” tenant. Some of the downtown locations are being successfully recycled so the vultures are now hovering around Macy’s flagship store in Manhattan, hoping for a quick profit on the real estate.
There is some optimism about the stock, and Macy’s online site will soon launch in China. Black Friday will probably see its usual spike in traffic. But nothing about the turnaround is proven, and the stock’s P/E multiple of 15 is still higher than that of Apple Inc. (NASDAQ:AAPL), which most investors assume has brighter prospects.
Will this be the last season where Santa Claus comes down Broadway to the store made famous by the movie “Miracle on 34th Street?” It may be. If it is, investors will cheer. For a while.
Retail Stocks to Watch for Black Friday: Dick’s Sporting Goods (DKS)
With the mall and its department store anchors fading away, there is a new conventional wisdom in retailing. Specialize. Do one thing, serve one type of customer very well, and you can turn a narrow category store into a destination.
Dick’s Sporting Goods Inc (NYSE:DKS) epitomizes this strategy. Had you bought into its story when it became public in 2002 your gain would now be over 1,400%. The shares split twice during the last decade and have been paying dividends since 2011, while advancing 46%.
Dick’s is about men — mostly men in their role as sports fans. It has succeeded by tilting its merchandise mix away from men playing games toward men watching games. Its website had Cubs championship merchandise on sale, on its homepage, within hours of the club’s winning the World Series. The site does flash sales, offers gift cards and has an alliance with Walt Disney Co.’s (NYSE:DIS) ESPN networks.
While rivals like Sports Authority have been going out of business, Dick’s has been picking up share, and now dominates its category, making it one of America’s hottest retailers. It won the bankruptcy auction for Golfsmith, the golf store chain, and will keep 30 of those 109 units open. Its strategy of pushing apparel and footwear, as opposed to actual sporting goods, is considered a winner. The company still has just 10% of the U.S. sporting goods market so potential for growth remains.
Growth, however, is starting to slow, as DKS stock becomes a victim of the law of big numbers. The 9% growth of fiscal 2015 became 7% growth in fiscal 2016, which ended last January, and that year-over-year pace is proving tough to sustain. Margins, meanwhile, have compressed, with 2016 net income falling a penny a share below that of 2015.
Still, most analysts like the stock and expectations are modest for its fall quarter, on which it reports Nov. 15. At that level, it seems fully priced, at P/E multiple of 20, a retailing stock worth 80% of its sales.
Zacks said it was “time to stock up” on Dick’s on Oct. 13 and you can still get in at the price they liked. And with sports still a big business, expect plenty of traffic for DKS on Black Friday.
Retail Stocks to Watch for Black Friday: Lululemon (LULU)
If Dick’s is about men watching games, Lululemon Athletica Inc. (NASDAQ:LULU) is about women doing the work.
The maker of yoga clothes came public in 2007 and has since risen over 300%, after weathering a scandal over see-through yoga pants in 2013 that forced the resignation of founder Chip Wilson.
Wilson crafted a unique strategy, where Lululemon sole-sourced the manufacture of its designs and sold them at full retail in its own stores. The result were some unusually high margins, with nearly 20% of fiscal 2013’s revenue hitting the net income line. His replacement, Laurent Potdevin, has continued the strategy.
Lululemon made yoga outfits fashionable, taking them out of the studio and into the street, sparking the “athleisure” trend. As with all such trends, athleisure eventually became an object of ridicule. Since the scandal, and what seems the peaking of the athleisure trend, margins have been reduced, but in fiscal 2016 the company still brought over 10% of revenue to the net income line, and it nearly matched that for the first two quarters of this fiscal year.
Lululemon is due to report earnings for its October quarter on Dec. 1, with analysts expecting 43 cents per share of net income on $542 million in revenue. That would be 13% year-over-year growth on the top line and the bottom line, justifying a P/E ratio that remains extreme at nearly 29, and a market cap that is nearly four times the company’s annual sales, a ratio that is better than even Apple.
Potdevin began his career at luxury conglomerate LVMH Moet Hennessy Louis Vuitton (OTCMKTS:LVMUY) and was hired from Toms Shoes, a socially conscious shoe retailer. He uses a network of “influencers” as brand ambassadors, rather than signing celebrity endorsers like Under Armour Inc (NYSE:UA) and Nike Inc (NYSE:NKE). The influencers are dedicated to causes as much as the company’s sales, and try to live a nurturing image rather than just represent the brand.
In 2017 Potdevin has to make a decision on whether to continue its Ivviva teen brand stores and ride herd on a new line of $300 running leggings, whose price seems to contradict the message of its ambassadors.
While Lululemon does sell clothes on its website, it is more focused on pointing consumers to stores, most of which are near high-end malls, and collecting e-mail addresses. For the Christmas season, it is emphasizing form-fitting running clothes for winter weather. LULU probably won’t hurt for shoppers in its stores on Black Friday.
The risk is that Lululemon faces the same fate as Whole Foods Market, Inc. (NYSE:WFM), a once high-flying “lifestyle” retail name brought low by its own high prices, and the contradictions between the values it espoused and those it lived.
Zack’s is among those that have recently decided it can’t, reducing the stock to a “sell.” The mean rating among analysts is still overweight but I personally think they are like those leggings — a little pricey for my taste.
Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, DIS and COST.