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Retailers: Follow the Growth Online
There's an old saying on Wall Street that investors should never
bet against the US consumer. For decades, that was good advice as
bounce-backs in consumer spending helped power the US economy out
of most post-war downturns.
However, that truism was upended in the wake of the housing bust
and financial crisis of 2007-2009. A toxic mix of weak economic
growth, paltry gains in personal income and reduced access to
credit prompted consumers to save more and focus on paying down
debts rather than spending.
The good news is that this era of consumer austerity isn't
hitting all retailers and Americans are increasingly in a buying
mood (see the chart, "Americans Open Their Wallets").
Sales momentum at some of the largest US retailers was positive
through the late summer "Back to School" season. The average North
American retailer tracked by Bloomberg reported that same-store
sales increased more than 6.2 percent in August, the fastest pace
so far this year. The resurgence was broad-based, with solid gains
in apparel, home goods, discount chains and department stores.
These trends bode well for the all-important holiday spending
And while overall retail sales have been weak, e-commerce
remains a growth market with online sales growing from under 1
percent of total US retail sales in late 1999 to more than 5
percent by the middle of 2012 (see the chart, "The Online Sales
Boom"). Here's a look at three stocks exposed to markets enjoying
particularly strong consumer spending.
) is best known as an online retailer of books, a business it
pioneered in 1995. The company is now the world's largest online
retailer, selling digital and print media, electronics, apparel and
myriad other categories of goods.
Amazon has been a disruptive force in the retailing industry and
it's now riding the growing popularity of ecommerce. The 2011
bankruptcy of Borders Books, once one of the largest and most
respected booksellers in the US, largely stemmed from the fact that
no bricks-and-mortar store can rival Amazon's inventory of
Amazon's growing selection of electronics goods offered at
discounted prices has represented a serious competitive threat for
once-dominant electronics retailer Best Buy (
) over the past few years. Best Buy has been forced to match
Amazon's prices to propel sales and the result has been weakening
profitability and margins.
Increasingly, Amazon is becoming the dominant e-commerce
destination site on the web. The share of Amazon's sales driven by
search engines such as Google has actually declined in recent
quarters, a sign that consumers are searching for items directly on
Amazon's site and a testament to the power of its brand.
Buyers feel their online payments on the website are secure
whether the goods they're buying are sold directly by Amazon or by
third-party sellers who simply use the company's website and
payments system to market their products.
The company's low-cost distribution platform, which includes
advanced inventory management systems and a network of warehouses,
conveys a major cost advantage over traditional retailers. As the
share of retail sales conducted online continues to jump in coming
years, look for Amazon to be a major beneficiary.
Perhaps the most important near-term growth driver for Amazon is
its digital media business and the Kindle Fire tablet computer. The
company recently introduced four new versions of the tablet that
will be available in time for the 2012 holiday season, including a
7-inch Fire priced at $159 and three high-definition (HD) Fire
models priced at $199 to $499.
While Amazon is tight-lipped about the manufacturing cost of the
Fire, most believe the company prices the units at close to cost
and makes its profits by selling to consumers digital media
delivered to the tablet.
Amazon has been particularly aggressive in expanding the video
content it conveys to Amazon Prime subscribers via the Kindle. Most
recently, the online giant inked a deal with pay television station
Epix to offer the latter's titles, including content produced by
) and its subsidiary Paramount Pictures, as well as Lions Gate
) and Metro-Goldwyn- Mayer. That deal brings Amazon's library of
video titles to over 25,000.
Trading at 2.2 times sales and 65 times 2013 earnings estimates,
Amazon.com is not a cheap stock but that valuation is justified by
its growing dominance of the online retailing industry.
) eponymous auction website allows users to buy and sell goods over
the Internet either through a competitive auction process or for a
pre-set price. In addition, the company also owns ticket re-seller
StubHub.com, Half.com and a number of other online properties.
These websites combined have over 100 million users and account for
about two-thirds of operating income.
However, while eBay's e-tailing websites will benefit from the
continuing shift in favor of online sales, a stronger growth
prospect for eBay is its PayPal payments division. Pay- Pal allows
retailers to set up an account and process credit and debit card
charges often in a matter of minutes. The system also handles
sensitive customer credit card data on customers' behalf.
In addition, PayPal allows users to set up an account to pay
merchants providing only their e-mail address and a password rather
than typing in their credit card details online.
Favoring online sales is the accelerating move towards a
cashless society- consumers are increasingly paying for goods with
credit and debit cards rather than with cash and checks. PayPal is
a major beneficiary of this revolution in retailing. Meanwhile,
operating income from eBay's payments segment is up more than 60
eBay has partnered with Discover Financial Services (DFS) on a
deal to facilitate offline transactions. Once the partnership is
completed, PayPal users will be able to use their account at any
merchant that accepts the Discover card.
Payments can be made either using a traditional plastic PayPal
issued card or via a PIN-based mobile transaction on a smartphone
linked to their account. The service is scheduled to start with
1,500 large merchants in the second quarter of 2013 and will be
rolled out across the Discover network.
While the rise of online retailers has hit profitability for
some types of brick-and-mortar retailers, there's still plenty of
value in the offline world. One example is
(HD), the world's largest home improvement retailer.
new home sales has been weak
over the past three years, but consumers have continued to spend on
remodeling their existing properties, pushing up demand for the
kitchen equipment, paint, flooring and hardware that are the core
of Home Depot's business mix. With home sales and prices finally
showing modest signs of firming up this year, Home Depot should
Home Depot's second-quarter 2012 results beat consensus
expectations. The company reported $1.01 in earnings per share
(EPS), compared to the estimate of $0.98 in EPS, and revenue of
$20.57 billion, compared to the estimate of $17.81 billion. EPS
rose 17.4 percent, while revenue climbed 1.7 percent, compared to
the same year-ago period. Learn to spot your own superstar stocks,
with our free report,
The 4 Secrets of Great Value Invetors