Do You Have an “Amazon Moat”?

Despite what reports say, retail isn’t dead — here’s how to find small retailers making huge gains

If you’re a bargain shopper, you’ve likely had today circled on your calendar for months …

That’s because if we go by the numbers alone, it’s a bigger shopping day than both Black Friday and Cyber Monday. In fact, on this day last year, over 100 million items were sold.

What’s going on here?

Amazon Prime Day.

For anyone unaware, Amazon Prime Day is a one-day event (this year, it’s been expanded to two days, yesterday and today) in which Amazon slashes prices on all sorts of items, leading to a frenzy of buying.

Estimates are that Amazon will generate sales of $6.1 billion between yesterday and today. For some context, it took retailer Abercrombie and Fitch all of 2018 to generate revenues of just $3.5 billion.

Amazon has been crushing retail for years now. And early investors have made a literal fortune — the stock is up more than 5,400% over the past 13 years.

 

 

In achieving this massive growth, Amazon has left a trail of business-carcasses. Remember Borders? How about Circuit City? Tower Records? Musicland?

Amazon played a significant role in the demise of each one of these companies. In fact, the impact of the retail giant is so significant, it’s led to the phrase “Death by Amazon.”


***But within this evolving retail landscape, some businesses are not only surviving, but thriving, and it’s making wise investors a fortune

For more on this, and to set the stage for the rest of today’s Digest, let’s turn to Matt McCall, editor of Early Stage Investor. In Early Stage Investor, Matt recommends a select group of small stocks that are riding trends for huge gains. Here’s Matt:

“R&R” investing is one of the most powerful wealth-building strategies on the planet.

Have you ever heard of it?

If not, you’re in good company. I’ve never seen a whole book about it, and it doesn’t get a whole lot of attention. But when the R&R strategy works as planned, 50-to-1 payouts are possible.

That’s $150,000 for every $3,000 invested …

I’m talking about “Retail and Restaurants” investing.

“Retail and restaurants” is probably not the first thing that comes to mind when you think “huge gains from big trends.” But Matt tells us that few types of businesses are able to generate massive customer demand and revenue growth in as short a time as retailers and restaurants.

That’s because when people go wild for a hit retail or restaurant concept, the sky is the limit for the businesses behind them. A concept that works in 10 locations can often be applied to 500 locations, which generates incredible growth.

For example, take Home Depot, climbing 3,700% in the 1990s … or Ulta Beauty (one of Matt’s past picks) which is up 1,900% since 2009 … or Ollie’s Bargain Outlet, which is up 5x from Matt’s recommended buy price back in 2016. In fact, the list of big winners from smaller retailers is so long that it points toward a key takeaway from Matt:

… even though investing in retail and restaurants may sound boring and is not your typical early stage investment theme,there is big money to be made in the right R&R stocks.

***But given Amazon’s massive impact, why would anyone want to invest in small retail today?

That’s a fair question. A moment ago, we referenced a handful of companies that were, in large part, killed off by Amazon.

Because of this, Matt’s strategy for finding the right small retail investment relies on a Four Factor Analysis — and one of them is “The Amazon Moat.”

The term has its origins in a different term — “economic moat,” which was popularized by Warren Buffett. This moat refers to a company’s ability to maintain an advantage over its competition. Perhaps that advantage comes through a superior brand, better technology, or possibly an advanced distribution network. Whatever its source, this moat helps a company defend against competitors stealing market share.

Applying this concept to small retailers, Matt looks for a business that is at minimal risk of Amazon swooping in and gobbling up customers.

As one example, Matt references auto parts retailers. He tells us that consumers generally don’t shop for, say, a new headlight on Amazon. Instead, they drive to the nearest auto parts store, like Autozone, to have the headlight replaced in minutes.

So, what’s the outcome of a business model that has an Amazon Moat?

Well, in this case, Autozone’s stock has climb 38x over the last 20 years.


***But there’s far more to finding a great small retailer than just this Amazon Moat

The next factor in Matt’s Four Factor Analysis is growing demographics. For example, when Chipotle Mexican Grill began its ascent, an increasing number of people were embracing fast casual dining while moving away from traditional fast food restaurants. This served as a natural tailwind to Chipotle’s growth. Finding and aligning with these demographic trends is key for small retailers.

When it comes to retail, a powerful demographic is millennials. Matt tells us they’re overtaking Baby Boomers as the largest demo group in the country. The businesses that focus on this group and successfully cater to their preferred styles and price points stand to reap huge profits.

The third factor is an expandable market. In other words, Matt doesn’t want a company that already has thousands of locations, like McDonalds. When a company is already this big, further expansion is incredibly difficult. But smaller companies with only a handful of locations have enormous growth potential. Matt tells us this is because companies with proven success in a smaller number of stores can typically replicate that success on a larger scale — therein “expanding” their market.

Finally, Matt looks for above-average revenue growth. From Matt:

A requirement of nearly every Early Stage investment is above-average revenue growth. This is even more important with R&R companies because future expansion is not possible without increasing revenue. Revenue funds expansion, which brings in more revenue, which funds more expansion. It’s a virtual cycle of growth.


***A small retailer that’s doing everything right

It’s one thing to highlight the factors Matt looks for in a small retail investment. It’s another to identify one of the actual companies Matt likes. Fortunately, he gave me permission to share one of his retail recommendations.

He recently found this company while attending cannabis conferences in Toronto. He was walking through Toronto’s shopping district when he came across a store in Eaton Centre he had never heard of before — Aritzia.

From Matt:

I had that déjà vu moment again. My encounter with this store reminded me of the first times I entered Ulta Beauty and Ross Stores. The same two things caught my attention — the shop had more shoppers than any other in the area, and I was extremely impressed once I got inside.

 

 

But wait, this was a brick-and-mortar store I was walking into. And aren’t all the talking heads on television preaching that brick and mortar is dying?

Well, considering the talking heads are wrong about 80% of the time, I wasn’t about to let that deter me from digging deeper. My investor gut was telling me I was on to something good, so I had to look into things on my own.

In short, Aritzia is a women’s retailer boasting a clothing quality that matches that of the high-end retailers, yet its prices are affordable. Matt tells us it offers cutting-edge fashion design, which is critical for a women’s retailer when going after a younger demographic. These are the clothes women are wearing and looking for today.

Aritzia has more than 11% of the women’s apparel market in Canada, which makes it difficult for a newcomer to enter this very fickle space. Expanding into the U.S., the company has plans to quadruple its footprint to 100 locations. This is the type of expansion Matt looks for — and it’s difficult to find in the niche women’s clothing segment.

Finally, Aritzia’s net revenue has grown every single year for the last two decades. Since 2008, growth has averaged 17% annually, which is phenomenal for this industry.

***In Matt’s Early Stage Investor issue, he goes on to analyze Aritzia through his Four Factor Model, which reveals a thriving business, poised for huge growth

To read all the details and get Matt’s specific buy-up-to price, click here. There’s a lot to like about Aritzia and a strong case to be made for it climbing 10x over the coming years. And as in all of Matt’s issues, you can learn a great deal simply by seeing an investment through his eyes and analysis.

Wrapping up, restaurants and retailers may not be on your radar when you think of huge gains from today’s trends. But as Matt tells us:

Any history of American business success has to include a large section devoted to retailers and restaurants … Offer Americans the opportunity to buy what they want — when they want it — and you have a very good shot at getting very rich.

So, on this Amazon Prime Day, remember that the right retailer can still provide huge returns for your portfolio. But make sure your case for buying is sound, and as part of that, how it will avoid “Death by Amazon.”

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/do-you-have-an-amazon-moat/.

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