With holiday shopping on my mind and Black Friday in clear sight, I am laser-focused on the retail sector and its participation in my clients’ investment portfolios.
Last week was big for consumers: October retail sales numbers beat expectations, and we had the earnings reports from multiple retailers. The overall retail report has been positive, but how can investors convert this into a buying opportunity? I always try to look for stories in earnings reports. What is the market telling us?
If we can identify trends and piece the themes together, we can begin to develop a thesis around investment opportunities and position portfolios accordingly. So, what can we conclude from the recent retail and especially last week’s earnings report?
Strong consumer consumption: Consumers are spending more and paying 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’ve also seen companies, especially those with the Pricing Power report, increase sales revenue despite passing higher costs along to customers in the form of higher prices.
Retail with one side of Tech = $: There is no doubt that we are in the midst of a revolution of digital adoption…that is the whole point. It seems like everything gets better when you sprinkle a little, or a lot, of technology on it. Marrying tech and taxi cabs led to the creation of Uber and Lyft. We found Instacart by combining technology with grocery shopping. In the third quarter, we saw digital selling in the spotlight in the retail sector. Target and Lowe’s both reported at least 25% growth in digital sales year-over-year. However, comparisons to last year don’t really tell the whole story. When we compare digital sales to 2019, we see that the whole game has changed. Compared to 2019, the increase is real.
Online sales growth in comparison to Q3 2019:
- Walmart: Up 87 percent
- Home Depot: 95% up
- Lowes: Up 158%
- Macy’s: Up 49%
- Kohls: Up 33%
Data is king: Data helps companies develop more customized experiences for buyers, retain customers, and ultimately increase revenue. The data being collected from online shopping is capturing the spending behavior of shoppers such as clothing size, preferred color and personal style. It is making companies smarter about the needs and preferences of their customers and they are using it to develop targeted communication so that buyers can get exactly what they want. From an inventory standpoint, predictive models can use the data to help a brand determine how many more sweaters they would sell if they didn’t run out of a particular size. While online shopping collects data, customer loyalty programs collect even more data for each customer.
Messi’s – I’m calling it a turnaround story. The most significant year-over-year sales growth rate in the October retail sales report was at department stores. Macy’s reported its third-quarter performance last week, and they beat expectations.
But let’s go back around 2018. Brick and mortar stores, especially department stores, were struggling to keep up with Amazon. Macy’s stock took a zero off the high board and was going down, never to be seen again — until last year.
In 2020, the company rolled out an ambitious plan to replace the brand, the Polaris Plan. They plan to close 125 of their lower-end stores and focus on their higher-end markets. He also plans to focus on his Macys.com business and launch a $1 billion private-label brand under Macy’s umbrella.
I believe the future of Macy’s lies in their online business. We can look to the spin-off of Saks.com earlier this year as proof of what an overhaul of the department store e-commerce business can do. Saks.com is now a fully functional and thriving technology company. Sales have increased by 30% since closing in April, the number of visitors to the site has doubled, and the overall merchandise value on the site has increased by 80%. While I don’t believe Macy’s should shut down their online business, if they’re able to turn their dot-com business into a marketplace — so it becomes the main event rather than expanding stores — they’re looking to adopt this digital. Can ride the wave all the way to the bank.
Macy’s stock was up more than 20% in reaction to the earnings drop last Thursday. It declined slightly this week, but is up more than 183% year-on-year and 283% more than last year. Macy’s currently trades at a considerable discount to pure e-commerce companies. If they successfully take over Macy’s.com, I believe it’s a bargain at its current valuation.
farfetch When I look at what sectors in retail represent the most opportunity in digital adoption, it’s the luxury space. Luxury brands have been slow to adapt to e-commerce partly because they want to be seen as the elite. Some people believe that if customers have to “click to add to cart” they may not translate. Also, luxury brands have always relied on their premium in-store experience to entice 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 this is the best position to capitalize on the change in online selling of luxury. They have more than 1,300 brands, serve more than 190 countries and, in the first half of 2021, saw a 60% increase in gross merchandise value, or GMV – the total dollar value of orders processed – with an average order of $593 . Since the first quarter of 2020, they have been adding about 450,000 new customers each quarter and maintained that rate in 2021, when most stores reopened.
Farfetch reported earnings last week. While revenue grew 33% year over year, and GMV was up 27% year-over-year, management expected GMV to increase 30%. The main reason they fell short of expectations was the increased cost of demand creation or campaigns to build brand awareness and target specific customers.
Despite the omissions, I believe that Farfetch is just getting started. 1) They have more brand and inventory than any other platform. 2) Over the past two quarters, they have grown their digital platform faster than any other luxury retailer. 3) Opening a retail store in China is not easy, but that country is the second largest market for Farfetch. The company is giving its 1,300 brands immediate access to Chinese consumers – the most important market in luxury. 4) At its core, Farfetch is a technology company and has leveraged its expertise to help brands create tech-driven, in-store experiences that extend to online.
Farfetch stock has seen good days. The stock is down about 42% year-over-year. However, if investors have the tolerance to be patient, there is a high chance that they will be rewarded over the next one to two years.
Tiffany McGhee is the founder, chief executive officer and chief investment officer of Pivotal Advisors, and a regular CNBC contributor.