This has been a pretty illuminating earnings season for longtime retail watchers such as yours truly.
I can still remember sitting all alone in a tiny conference room back in 2004 listening to retailers getting ready to launch their first-ever transactional websites. It was so chic yet thrilling at the same time because nobody knew what would happen next. Others scoffed at the mere thought of shipping consumers merchandise via this thing called the Web and not have people visit beautiful-looking stores stocked with mannequins. Then there were the many that simply didn't have the money to develop the technology needed to be early adopters of web shipping.
This particular earnings season, talk has centered primarily on two things: horribly weak store sales and what can be done online to get people to visit stores. Websites are being visually overhauled yet again. Tweaks are being made to the checkout process. More companies are launching ship-from-store programs to satisfy online orders.
If you are an average investor on these retail earnings calls, it's very easy to get lost in the dialogue and who is actually winning. Indeed, I admit to being burned out trying to consume as many conference calls as humanly possible to stay abreast of all the retail happenings while working sources behind the scenes. And honestly, I have no idea where all this legwork is getting me -- if I was an average investor I would have no clue where to hunt for value in the badly beaten-up retail sector and probably would just put more chips on Amazon (AMZN), which is causing the retail sector to be badly beaten up.
The degree of disruption by Amazon is intensifying, and I truly believe there will be some high-profile national bankruptcies within retail during the next five years as a result -- and I am not talking about second-rate players such as Aeropostale and Sports Authority, but best-in-class retailers that no longer can operate effectively in a public company setting due to the disruption and their high debt loads. But that is a discussion for a different day.
So I think the best way to make money in retail is to look at the sectors that Amazon isn't disrupting and is unlikely to disrupt anytime soon for specific reasons. For example, if you look at shares of Home Depot (HD), Lowe's (LOW), TJ Maxx (TJX) and Dollar Tree (DLTR) over a two-year time frame, I think their material outperformance versus the S&P 500 is the market wagering these companies are somewhat Amazon-proof.
Sorry Amazon, can't mess with these companies. Source: Yahoo! Finance
Off-price retailers: TJ Maxx had a mind-blowing first quarter at all of its divisions, but especially HomeGoods. The company continues to defy conventional wisdom in the retail sector, and the stock has continued to act well despite Amazon making inroads into apparel in recent months. The reason is pretty simple. TJ Maxx has built a competitive advantage in the apparel and home goods sectors that Amazon is unlikely to duplicate anytime soon -- namely, TJX has strong, longtime relationships for securing unique product around the globe. The company finds sick deals on name-brand offerings, sticks limited quantities in the stores, and creates a sense of excitement among people to come for a visit. I mean, the company only last year launched a website mostly as an afterthought! That is insane.
The only thing I see standing in the way of TJ Maxx over the next five years is a U.S. recession.
Dollar stores: Take a second and think why dollar stores such as Dollar Tree and Dollar General (DG) are Amazon-proof. Give up? It's completely inefficient for Amazon to ship cheap items sourced from China for $1.00! Bricks-and-mortar retailers continue to be hammered by Amazon's willingness to earn no margins, or a little, on sales it ships out to consumers in an effort to gain share. But trying to sell the items found in dollar stores would be plain old silly for Amazon and something I do not see it getting into anytime soon (Amazon can't even sell the stuff in bulk -- dollar-store consumers can't afford to spend that amount of cash on bulk items).
So dollar stores are safe for now.
Home improvement retailers: Yes, you could find home décor items and appliances on Amazon. And I suspect the company is having a degree of success selling some of those items. But, by and large, to sell home improvement goods a merchant needs to have a strong service component, as does the kitchen department at Home Depot. Amazon doesn't have that personal one-on-one interaction that is essential to the business. Moreover, home improvement retailers are destinations for contractors working each day on jobsites. Unless Amazon is magically able to deliver five pieces of lumber and a box of nails in 10 minutes to John Doe who is building a KB Home spec home, home improvement retailers will continue to be in a strong position.
Personally, I think Amazon should consider buying Lowe's or Home Depot to get into the home improvement space. Merchandise is kept in a no-frills warehouse setting, both are very efficient organizations and there is going to be a wave of millennials buying homes over the next 10 years.
