Retail is Dead, Long Live Retail?

“I am sure we can find it on Amazon.” If I had a dollar for every time I have uttered that phrase, I would be long retired. And that’s just since February when we moved into a new house. The timing of the move was not ideal (in hindsight), right before COVID shut everything down. So we found ourselves doing a fair amount of shopping online, like everyone else. And like most people, our “go-to” destination for a lot of things was Amazon. This probably should not surprise anyone. S&P Global recently published a list of the top 10 companies by estimated percentage of e-commerce growth. They estimate that total e-commerce growth will increase by ~$108 billion in 2020, with Amazon accounting for 43% of that gain. The note was published on June 30th.

Looking down the list, it is easy to assume that for the most part, Amazon is really the only game in town. But something funny happened. We were not just shopping at Amazon when we needed something for the house. I made more than a handful of trips to the Home Depot website and Wayfair now knows a fair bit about what we like.

What does this have to do with markets and investing? Well, Amazon has performed well and I am a happy owner. But look at some of the other names on the list and how they have performed year to date:

Fine, AMZN has been the winner, that’s great. But the others have put in a strong showing as well. Plus, if you look at just the past three months, all five of these other stocks are beating AMZN pretty handily.

I do not own any of these stocks. The worst part is that I could have looked at any of their charts and made a case for owning them. Every single one of them moves up and to the right, something along the lines of this chart of Target (TGT).

I missed every single of one of them. The question is why? Sadly, I know the answer. Because retail is dead. At least that is what I read. That’s what I see when I go to the mall. That’s what the mostly empty Macy’s parking lot tells me every time I drive by it. That is the preconceived notion that has been allowed to build up in my thinking over the past few years. Add in the fact that I hate going to the store, it was easy for me to confirm my “retail is dead” point of view.

Then I read this from Gavin Baker. Pulling from his personal site, he is the former portfolio manager for the $17-billion Fidelity OTC Fund. During his 8 year tenure, the fund outperformed over 99% of its Morningstar peers, compounded at roughly 19.3% annually net of fees and won 6 Lipper Awards. Gavin was named the Boston Globe’s “Fund Manager of the Year” in 2014. So Gavin knows what he’s talking about.

The note points out how the prevailing view is much like mine. But, there are certain companies which he calls category killers which have made the shift. Here is how he describes a category killer: brick and mortar retailers who have dominant share in a category — whether it be home improvement, general merchandise, electronics or any other retail category. They have recognized that they need to have more than just their brick and mortar presence. They understood that for the most part, people like to shop online and, more importantly, we like to have options. I have done a fair amount of Buy Online, Pick-up In Store (BOPIS). Including this option, Wal-Mart’s digital revenue in Q2 was an annualized $42 billion, growing 94% — faster than Amazon. Best Buy’s digital revenue in Q2 was an annualized $19.4 billion, growing 242% — faster than Amazon.

Here is what’s even more interesting. Amazon itself has recognized that consumers like having options, they are doing the same thing in reverse: Amazon opened dozens of “Amazon Go” stores in 2019 and is reportedly planning on opening up to 3000 of these stores by 2021 in the United States alone. Amazon already has multiple store formats in the United States: Go, Whole Foods, Book Stores and others. 

Gavin’s note is arguably the best thing that I have read this week so far for one reason. Because it opened my eyes to something that I was not thinking about. Because it made me think that maybe retail is not dead but simply transforming. It made me see that the companies who possibly have the best chance of winning are the ones which cater to consumers by giving us choice, not just in product but how we obtain it.

Having preconceived notions and ideas is a major drawback when investing (and in life in general). I missed these opportunities despite being able to look at the charts and see that the stocks were going. That’s the whole point of looking at the charts. I never let the “retail is dead” mantra go, even though I was shopping at places other than Amazon, online. To hammer home the point of just how wrong that view is was, here is one more chart that was staring me in the face. The Decline of the Retail Store ETF, ticker symbol EMTY (as in the stores are empty). This fund bets against the retailers, it goes up when their stocks go down…looks like quite the opposite.

I don’t know if this run in the retail names has more legs to to it, that’s not the point. I just wonder what other notions I have. Will I find them and have the conviction to act when the time is right?

I write more in a more in-depth look at the markets every trading day. Feel free to check it out.