The Fight For Internet Dominance - With holiday spending expected to rise 4-5% this year the number of consumer dollars available to retailers is staggering. Excluding gas stations, restaurants, and car dealers consumers are expected to spend upwards of $725 billion dollars this holiday season. The holiday season, the key spending days between Thanksgiving and New Year, is shorter this year so every dollar spent counts more than ever.
Online Is The Fastest Growing Segment Of Retail
The fastest-growing segment of retail is online. This year online and non-store purchases are projected to grow 12-15% which makes the obvious winner Amazon (AMZN). Amazon is the number one source for online purchases in the U.S. and not likely dethroned soon.
Analyst Yousef Squali at Suntrust says he is “incrementally positive” about Amazon for three reasons; Amazon has the largest selection, the best customer experience, and competitive prices. I agree with him on those points but that doesn’t make Amazon the best investment now. Competition within the online space is heating up. If there is one thing that consumers like it is choice and that means Amazon is at risk of losing market share.
Notably, Amazon announced it was doubling its number of seasonal hires, a sign the company is expecting a lot of business this year. Even so, Amazon has been lagging the market since August and trading very near the four-month low.
Competition Heats Up
Although late to the show, companies like Walmart (WMT), Targe (TGT), and Home Depot (HD) have successfully launched their online presence and proved their ability to compete in the ether. Likewise, brands like Nike(NKE) have broken their arrangements with Amazon allowing consumers a more direct method of obtaining their products while boosting the bottom line.
Walmart reported eCommerce surged 41% in the last quarter. The results drove better than expected comp-store sales in the U.S. and are attributable to grocery sales. Grocery sales are going to drive comps in the coming quarters as well due to the ongoing rollout of the program. Another 1,400 U.S. stores are expected to add online grocery ordering, delivery, and pick up as soon as this quarter. Walmart has been leading the broad market this year and now trading near a freshly set all-time high.
Target reported a strong double-digit 31% growth in its online segment too. Target is driving the growth of online with a highly successful same-day delivery service that Bank of America Merril Lynch cited prominently in a recent letter to investors. According to them the program is “firing on all cylinders” and signs are strong brick-and-more sales will outpace 2018 too. Online sales were over 7% of total revenue in the 3rd quarter making it a very significant driver of future earnings potential. Shares of Target have been outpacing most other stocks this year and up nearly 40% in the last 6 months alone.
Home Depot has been pursuing a multi-channel presence and showing some success as well. As a frequent user of Home Depot, I love the ability to check what’s in stock and where things are located with my phone. Online sales for Home Depot rose 22% YOY with roughly half resulting in an in-store pickup. The issue at hand for Home Depot is its struggle to upgrade a legacy system. CEO Craig Menear says the work is progressing but taking longer than originally planned. Shares of Home Depot have been a market leader this year but fell after missing consensus estimates with the last earnings report. Home Depot is now trading near its recently broken previous all-time high which should now provide strong support.
Nike broke with Amazon in order to build a better customer interface, something it thinks it can do with Footlocker. The move is smart because Footlocker also has a growing digital presence which means Nike’s loyal customers can purchase online and then pick up their shoes in the store. Footlocker’s Direct-to-Customer sales, what they call digital, rose 11.4% in the last quarter to 15.3% of revenue proving the power of eCommerce. Shares of Footlocker are lagging the market this year and trading near a long term low. The stock yields about 3.8% at today’s prices so there is an incentive to buy.