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With holiday shopping in mind and Black Friday in sight, my focus is on the retail industry and its involvement in my clients’ investment portfolios.
The past week has been an important one for consumers: October retail sales figures exceeded expectations and a large number of retailers reported profits. Overall, the retail reports are positive, but how can investors translate this into buying opportunities? I always try to look for the stories in the income reports. What is the market telling us?
If we can identify trends and piece together the themes, we can start to develop a thesis on investment opportunities and position portfolios accordingly. So what can we conclude from recent retail reports and in particular last week’s results?
Trends and themes
Consumer consumption is high: Consumers spend and pay more for the products they want. Retail sales in October represent the third consecutive monthly increase in retail sales and the largest monthly increase since last spring. We’ve also seen companies, especially those with pricing power, report increases in their sales revenue despite passing higher costs on to customers in the form of higher prices.
Retail business with a technological side = $: There is no doubt that we are in the midst of a digital adoption revolution… that’s it. Everything seems to improve when you sprinkle a little or a lot of tech on it. The marriage of technology and taxis created Uber and Lyft. Pairing technology with groceries gave us Instacart. In the third quarter, we saw digital sales in retail dominate the headlines. Target and Lowe’s both reported at least a 25% year-over-year increase in digital sales. However, the comparison to last year doesn’t really tell the whole story. When we compare digital sales to 2019, the pre-pandemic numbers, we see that the whole game has changed. Compared to 2019, the increases are real.
Growth in online sales compared to the third quarter of 2019:
- Walmart: up 87%
- Home Depot: up 95%
- Lowe’s: up 158%
- Macy’s: up 49%
- Kohl’s: up 33%
Data is king: Data helps businesses develop more personalized experiences for buyers, retain customers, and ultimately increase revenue. Data collected from online shopping captures shoppers’ consumption behavior, such as clothing size, preferred color, and personal style. It makes businesses smarter about the needs and preferences of their customers and they use it to develop targeted communication to give buyers exactly what they want. From an inventory perspective, predictive models can use data to help a brand determine how many more sweaters it would have sold if it hadn’t sold out a particular size. While online shopping collects data, customer loyalty programs capture even more data specific to each customer.
Macy’s – I call it a story of reversal. The largest year-over-year sales growth rates in the October Retail Sales Report were in department stores. Macy’s reported its third quarter performance last week and has exceeded expectations.
But let’s go back to around 2018. Brick-and-mortar stores, especially department stores, struggled to keep up with Amazon. Macy’s shares took a nosedive and continued to decline, never to be seen again – until last year.
In 2020, the company developed an ambitious brand recovery plan, the Polaris Plan. They plan to close 125 of their lower-level stores and focus on their high-end markets. They also plan to focus on their Macys.com business and launch six billion dollar private labels under the Macy’s umbrella.
I believe the future of Macy’s lies in their online business. We can look at the Saks.com spin-off from earlier this year as proof of what an overhaul of a department store e-commerce business can accomplish. Saks.com is now a fully functioning and successful technology company. Sales have increased by 30% since their inception in April, the number of visitors to the site has doubled and the total value of merchandise on the site has increased by 80%. While I don’t think Macy’s needs to part ways with its online business, if it is able to turn its dot-com business into a market – so this becomes the main event, rather than an extension of stores – they can benefit from this digital adoption. wave up to the bank.
Macy’s stock rose more than 20% last Thursday in reaction to lower profits. There was a small drop this week, but it’s up over 183% since the start of the year and over 283% in the last year. Macy’s is currently trading at a significant discount compared to pure e-commerce companies. If they manage to get hold of Macy’s.com, I think that’s a deal at its current valuation.
Farfetch – When I look at which areas of retail represent the most opportunities for digital adoption, it’s the luxury space. Luxury brands have been slow to adapt to e-commerce in part because they want to be seen as an elite. Some think their je ne sais quoi may not translate if customers have to “click to add to cart”. In addition, luxury brands have always relied on their premium in-store experience to attract customers.
Farfetch, a luxury ecommerce marketplace provides retailers and brands with an online sales platform and access to their 3.6 million luxury shoppers. I think he is in the best position to capitalize on the shift from luxury to online sales. They have more than 1,300 brands, serve more than 190 countries and in the first half of 2021, they saw a 60% growth in the gross value of goods, or GMV – that is, the total dollar value of goods. orders processed – with an average order of $ 593. Since the first quarter of 2020, they have added around 450,000 new customers each quarter and have maintained that rate until 2021, when most stores reopened.
Farfetch announced its profits last week. As revenue grew 33% year-over-year and GMV grew more than 27% year-over-year, management expected 30% GMV growth. . The main reasons they fell short of expectations were the increased costs of generating demand or campaigns to build brand awareness and target specific customers.
Despite the hiccup, I think Farfetch is just getting started. 1) They have more brands and inventory than any other platform. 2) Over the past two quarters, they’ve grown their digital platform faster than any other luxury retailer. 3) It is not easy to open a retail store in China, but this country is Farfetch’s second largest market. The company offers its 1,300 brands instant access to Chinese consumers, the largest luxury market. 4) At its core, Farfetch is a technology company and has leveraged its expertise to help brands create technology-driven in-store experiences that extend online.
Farfetch stock has seen better days. Since the start of the year, the stock is down about 42%. However, if investors have the tolerance for being patient, there is a good chance that they will be rewarded within the next couple of years.
Tiffany McGhee is the Founder, Managing Director and Chief Investment Officer of Pivotal Advisors and a regular contributor to CNBC.