I have written about retail stocks as investment ideas in the past on GuruFocus but to quote the great economist, John Maynard Keynes, "When the facts change, I change my mind. What do you do, sir?"
As readers probably know, many retailers were crushed this past earnings season. I’ve read the earnings call transcripts to a number of these companies and have concluded that the industry belongs in the “avoid” bucket. The simple reason is I don’t have a clue where consumers will spend their money.
As an example, earlier this year, the most annoying clip ever became viral, the “Damn Daniel” clip. For the latest quarter, the maker of Vans shoes, VF Corporation (VFC, Financial), credited the clip for 100% sell-through in white Vans for its wholesale channels and patted itself on the back for its marketing prowess in the earnings call. I have another interpretation. I call it dumb luck. Daniel could have been wearing Skechers just as easily.
Recently, a much more endearing viral video of a lady roaring in delight over a Chewbacca mask generated a lot of free publicity for Kohl’s. The mask normally retails at $30. When I first checked Amazon.com (AMZN, Financial), the Chewbacca mask was sold out. At the time of this writing, the Chewbacca mask was selling for $91 on Amazon.
These examples gave me another reason to be bearish on brick and mortar retail stocks which is anyone can impulse buy anything at any time from anywhere on mobile devices. This situation diverts discretionary money of the average American who has little in the way of savings. When Vans sales go down next quarter, I wonder if the CEO will blame the sales shortfall on unseasonably strong demand for Chewbacca masks.
A number of factors have contributed to mobile commerce’s momentum:
- Smartphone and high speed network penetration.
- Improvement in the mobile experience.
- Larger screen sizes for smartphones which allow for easier product research.
- Improved delivery times (Amazon Prime).
- Increased consumer trust.
When you combine all of the above factors, it paints a grim picture for brick and mortar stores. The presentation by comScore below reviews how mobile commerce is gaining momentum. It’s outstanding. I highly recommend it to anyone who is thinking about investing in retail stocks as it will probably change many minds.
The two slides below are among the more eye-opening findings. The first slide shows how digital commerce defined as desktop plus mobile is accelerating. The second slide shows that apparel overtook computer hardware in 2015 as the category where consumers spent the most money online.
There’s an ominous trend for retailers where shoppers are ordering multiple sizes of the same apparel piece and then returning the sizes that don’t fit. To make matters worse, shoppers expect free shipping, which is killing margins.
It’s a good idea to ask the question if we are falling into the trap of linear thinking. Is it overly simplistic to expect ecommerce to continue gaining marketshare unabated or will there be a flattening of the curve? It’s extremely difficult for brick and mortar stores to compete when they offer less selection, less convenience, don’t have product reviews and in some cases can’t match price.
I also don’t like that many retailers rely on the holidays for profitability. The holidays are the time when the value and convenience of ecommerce shines. Another worrying trend is that the gap between Amazon and its competitors continues to widen. Amazon is evolving faster than its competitors can keep up. Does anyone foresee Walmart (WMT, Financial) releasing a device to compete with Amazon's Echo any time soon?
When you think ahead, online shopping will become more ubiquitous, young people will grow up believing that virtual shopping is the norm and physical shopping is the exception. Any way I think about it, I’m not seeing a lot of redeeming qualities for the physical store business model. The comScore video makes an extremely compelling case.
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