With holiday shopping on my mind and Black Friday in plain sight, I’m 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 a slew of retailers report earnings. Overall retail reports have been positive, but how can investors translate that into buying opportunities? I always try to look for the stories in earnings reports. What is the market telling us?
If we can identify trends and piece together themes, we can start to develop a thesis around investment opportunities and position portfolios accordingly. So, what can we conclude from recent retail and particularly last week’s earnings reports?
Trends and themes
Consumer consumption is strong: Consumers are spending and paying more for the products they want. October retail sales represent the third straight 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 sales revenue despite passing higher costs along to customers in the form of higher prices.
Retail with a side of tech = $: There is no doubt that we’re in the middle of a digital adoption revolution…it’s a whole thing. Everything seems to get better when you sprinkle a little, or a lot of tech on it. Marrying tech and taxi cabs created Uber and Lyft. Putting tech together with grocery shopping gave us Instacart. In the third quarter we’ve seen digital sales in retail dominate the headlines. Target and Lowe’s both reported year-over-year increases of at least 25% in digital sales. However, the comparison to last year really doesn’t tell the full story. When we compare digital sales to 2019, pre-pandemic numbers, we see that the entire game has changed. Compared to 2019, the increases are real.
Online sales growth 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 companies develop more customized experiences for shoppers, retain customers and ultimately grow revenue. The data being collected from online shopping is capturing shoppers’ spending behavior such as clothing size, favorite color, and personal style. It is making companies smarter about their customers’ needs and preferences and they are using it to develop targeted communication to give shoppers exactly what they want. From an inventory perspective, predictive models can use data to help a brand determine how many more sweaters they would have sold if they didn’t run out of a particular size. While online shopping gathers data, customer loyalty programs capture even more data specific to each customer.
Investable opportunities
Macy’s – I’m calling this a turnaround story. The most significant year-over-year sales growth rates in October’s retail sales report, was in department stores. Macy’s reported their third-quarter performance last week, and they beat expectations.
But let’s go back to around 2018. Brick and mortar stores, especially department stores were struggling to keep up with Amazon. Macy’s stock took a nosedive off the high board and kept going down, never to be seen again — until last year.
In 2020, the company laid out an ambitious plan to turn around the brand, the Polaris Plan. They made plans to close 125 of their bottom-tier stores and focus on their higher-end markets. They also plan to focus on their Macys.com business and launch six $1 billion private-label brands under the Macy’s umbrella.
I believe the future of Macy’s lies in their online business. We can look at the spin-off of Saks.com earlier this year as evidence of what an overhaul of a department store e-commerce business can accomplish. Saks.com is now a fully functioning and thriving tech company. Sales are up 30% since they spun off in April, the number of visitors to the site have doubled, and the total merchandise value on the site has increased 80%. While I don’t believe Macy’s should spin off their online business, if they are able to transform their dot-com business into a marketplace — so it becomes the main event, rather than an extension of the stores — they can ride this digital adoption wave all the way to the bank.
Macy’s stock was up more than 20% last Thursday in reaction to the earnings beat. It took a tiny dip this week, but it’s up over 183% year-to-date and up over 283% over the past year. Macy’s currently trades at a significant discount to pure e-commerce companies. If they successfully make over Macy’s.com, I believe it is a deal at its current valuation.
Farfetch – When I look at which areas within 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 elite. Some believe that their je ne sais quoi may not translate if customers must “click to add to cart.” Also, luxury brands have always relied on their premium in-store experience to woo customers.
Farfetch, a luxury e-commerce marketplace offers retailers and brands an online sales platform and access to their 3.6 million luxury shoppers. I believe it is best positioned to capitalize on luxury’s shift to online sales. They have over 1,300 brands, serve more than 190 countries and in the first half of 2021, they had 60% growth in gross merchandise value, or GMV – that is, the total dollar value of processed orders – with an average order of $593. Since the first quarter of 2020, they have been adding about 450,000 new customers each quarter and kept up that rate into 2021, when most stores had reopened.
Farfetch reported earnings last week. While revenue grew 33% year over year, and GMV was up over 27% year-over-year, management’s expectation was 30% growth in GMV. The main reasons they fell short of expectations was due to increased costs for demand generation or campaigns to build brand awareness and target specific customers.
Despite the miss, 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 store in China, but that nation is Farfetch’s second largest market. The company is providing their 1,300 brands instant access to Chinese consumers – the most important market in luxury. 4) At its core, Farfetch is a tech company and has leveraged its expertise to help brands create tech-driven, in-store experiences that extend to online.
Farfetch stock has seen better days. Year-to-date the stock is down about 42%. However, if investors have the tolerance to be patient, there is a great possibility 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.