Retail vs e-Commerce
Retail is a sector that I've taken notice to over the past few weeks, particularly due to the fact that it's become fairly reasonable from a value perspective.
Companies that have grown earnings per share and dividends per share at 10, 12, 15, or even 20% per year over a handful of years are trading at PE ratios in the mid-teens. Many of these companies have actually been growing EPS per share in the double digit range for a few decades now. ROA is commonly high, ROE is commonly high, and buybacks are a plenty.
Assuming that these companies can successfully navigate the next 5-10 years - and continue to grow EPS at or near historical rates - investors might be looking at a basket of companies that could potentially provide a rate of return in the 10-15% range over the foreseeable future. These aren't necessarily homerun types of returns, but enough to warrant a decent position in the sector.
But - can these companies maintain these earnings trends in the face of growing e-commerce? Best Buy and Circuit City were retail companies that appeared to be doing just fine, until they (very quickly) got rocked by the rise in e-commerce. People are now blaming e-commerce on the decline of Sears, JC Penny, and the office supply stores. I think e-commerce generally takes down the weaker players first – who’s next?
There are a few companies that likely don't need to concern themselves with online sales, at least for now. Big Lots, Family Dollar, and discount clothing stores like Cato, Ross, or Nordstrom Rack come to mind. For the most part, I'm guessing these companies are competing with unemployment, bad weather, and each other.
I think CVS, Rite Aid, and Walgreen also aren’t next on the e-commerce hit list. Walgreen actually made the Top 50 e-commerce list, at #49, so these companies are apparently somewhat concerned with e-commerce competition. I’m just not sure how much…
But as for the companies that definitely have to compete with e-commerce (large retail, dept stores, etc.), I think that the first step is to actually participate in e-commerce. (Novel thought, I know.)
But, I don't think it's just enough for a retail company to have an e-commerce platform. Best Buy, after all, ranked #13 on a list of top e-commerce companies in 2012. They finished with $2.6B in domestic e-commerce sales. If you look at Best Buy's top-line, it's remained quite stable. It's the pinch on margins that's been the thorn in their side. The same goes for Staples, who ranked #14 on the e-commerce rankings list with $2.5B in e-commerce sales. For the most part, they've maintained stable revenues (though last quarter was a bit rough), but margin pressure has been their biggest problem.
Other companies that are doing “well” with e-commerce sales are Macy's, The Gap, Nordstrom, Wal-Mart, Target, Costco, Williams and Sonoma, L-Brands, and a few others well-known retail names. Most of these companies haven't experienced the drastic reductions in margins that Best Buy has seen...yet. But as we found out with Circuit City, Best Buy, Office Depot, et al, it can happen pretty quickly.
I'm not sure of the fate of these retail companies or what they should do to get into a position where they can fully embrace e-commerce. But thus far, many of them (save a few) seem to be doing just fine. With the retail sector trading at a decent discount, lately, I'd like to offer up the Buffett quote: "be greedy when others are fearful." But simultaneously, another famous quote of his comes to mind: "If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy."