With Christmas shopping in mind and Black Friday in mind, I focus on retail and its involvement in my clients’ investment portfolios.
The last week has been big for consumers: October retail sales exceeded expectations and we had a number of retailers reporting their profits. The retail reports have been positive overall, but how can investors translate this into buying opportunities? I always try to look for the stories in the revenue reports. What is the market telling us?
If we can identify trends and compose topics, we can begin developing a thesis on investment opportunities and positioning portfolios accordingly. So what can we conclude from the most recent retail and especially last week’s earnings reports?
Trends and topics
Consumer consumption is strong: Consumers spend more and pay more for the products they want. October retail sales represent the third consecutive monthly increase in retail sales and the largest monthly increase since last spring. We have also seen companies, especially those with pricing power, report increases in sales despite reporting higher costs in the form of higher prices the customers have passed on.
Retail with technical side = $: There is no doubt that we are in the middle of a digital adoption revolution … it’s a whole thing. Everything seems to get better if you sprinkle a little or a lot of tech on it. The marriage of tech and taxi companies resulted in Uber and Lyft. The combination of technology and grocery shopping gave us Instacart. Retail digital sales dominated the headlines in the third quarter. Both Target and Lowe saw digital sales increase by at least 25% year over year. However, the comparison to the previous year doesn’t really tell the whole story. If we compare digital sales to pre-2019 pandemic numbers, we see that the whole game has changed. Compared to 2019, the increases are real.
Online sales growth compared to Q3 2019:
- Walmart: up 87%
- Home depot: increased by 95%
- Lowes: up 158%
- Macys: up 49%
- Kohls: up 33%
Data is king: Data helps companies develop customized experiences for buyers, retain customers and ultimately increase sales. The data collected during online shopping record the buying behavior of buyers such as clothing size, favorite color and personal style. It makes companies smarter about their customers’ needs and preferences and they use it to develop targeted communication to get 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 run out of a certain size. While data is collected when shopping online, loyalty programs collect even more customer-specific data.
Investable Opportunities
Macys – I call this a turning point. The most significant year-over-year sales growth rates were recorded in department stores in October’s retail sales report. Macy’s reported its third quarter performance last week and 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 stock plunged off the highboard and continued down, never seen again – until last year.
In 2020, the company unveiled an ambitious plan to reorient the brand, the Polaris Plan. They planned to close 125 of their lowest stores and focus on their high-end markets. They also plan to focus on their Macys.com business, launching six private label brands valued at $ 1 billion under the Macy’s umbrella.
I believe the future of Macy’s lies in its online business. We can look at the Saks.com spin-off earlier this year as evidence of what an e-commerce overhaul can do in department stores. Saks.com is now a fully functional and thriving technology company. Revenue has increased 30% since the split in April, the number of visitors to the site has doubled, and the total value of goods on the site has increased 80%. While I don’t think Macy’s should outsource its online business, if they can turn their dot-com business into a marketplace – so that it becomes the main event, not an extension of the business – they can ride that digital adoption wave to the bank.
Macy’s stock was up more than 20% last Thursday in response to the bottom line. It took a small decline this week, but is up over 183% since the start of the year and over 283% last year. Macy’s is currently trading at a significant discount to e-commerce-only companies. If they successfully take over Macy’s.com I believe the current review is a deal.
Farfetch – When I look at which areas of retail have the greatest opportunities for digital adoption, this is the luxury area. Luxury brands have been slow to adapt to e-commerce, partly because they want to be seen as the elite. Some believe that their je ne sais quoi may not translate when customers have to “click to add to cart”. Plus, luxury brands have always relied on their premium shopping experience to attract customers.
Farfetch, a luxury e-commerce marketplace, provides retailers and brands with an online sales platform and access to their 3.6 million luxury shoppers. I believe it is best positioned to benefit from the shift in luxury to selling online. They have over 1,300 brands, serve more than 190 countries, and saw gross value or GMV growth in the first half of 2021 – i.e. They have acquired around 450,000 new customers every quarter since the first quarter of 2020, and have held that rate until 2021, when most stores reopened.
Farfetch reported earnings last week. While revenue grew 33% year over year and GMV grew over 27% year over year, management expected GMV to grow 30%. The main reasons that they fell short of expectations were increased costs for generating demand or campaigns to increase brand awareness and target customers.
Despite the failure, I believe Farfetch is just getting started. 1) They have more brands and inventory than any other platform. 2) In the past two quarters, they have grown their digital platform faster than any other luxury retailer. 3) It is not easy to open a retail business in China, but that country is Farfetch’s second largest market. The company offers its 1,300 brands instant access to Chinese consumers – the most important market for luxury goods. 4) At its core, Farfetch is a technology company and has used its expertise to help brands create technology-centric in-store experiences that extend to the Internet.
Farfetch stock has seen better days. Since the beginning of the year, the share has fallen 42%. However, if investors are patient, there is a good chance they will be rewarded in the next year or two.
Tiffany McGhee is the founder, chief executive officer and chief investment officer of Pivotal Advisors and a regular contributor to CNBC.
