Stocks gave back some of Monday’s big gains yesterday in orderly profit taking. While the past several sessions have been volatile with big swings in each direction, the net change has been nominal. 10-year Treasury yields spiked to over 1.6% Thursday morning, but have settled back to just over 1.4% as of yesterday’s close. We are getting a lot of economic news this week for February. The biggest report will be Friday’s employment number which may show a slight uptick in wage rates. But overall, the message is the same. Growth is soaring and inflation is still pretty well contained.
If you want to understand the impact of the pandemic, there is no better place to look than the earnings reports released yesterday by Target and Nordstrom. Target had same store sales growth of over 20% for its most recent quarter. That included Internet sales, which soared. On a store-only basis, sales rose 7%. Nordstrom, in contrast, saw a sales decline of 20% on a same store sales basis. Six-nine months ago, that difference could be explained by the fact that almost all Target stores were open while many Nordstrom stores were closed. But in the quarter that just ended in January neither company had closed stores.
Over the past several years Target has invested heavily to improve its online presence. Digital sales in the most recent quarter more than doubled those of a year ago. This includes orders for goods delivered to the home and orders for goods to be picked up at the store. While Nordstrom has long been a leader in omnichannel within the department store sector, it reacted much more slowly than Target. The Covid-19 pandemic changed how we go about our daily lives. A year ago, as the world began to shut down, most of Nordstrom’s physical stores closed. Their goods were not deemed essential (mostly clothing). The majority of Target stores stayed open. Many Nordstrom stores were in malls. Even when malls reopened, Americans were hesitant to go indoors or to expose themselves to close contact.
But that was last spring and summer. There are certainly many of us still careful about going into malls, wary of close contact and the lack of proper ventilation. However, that is only part of the story, maybe a lot smaller part than what one might think. The pandemic forced us to change. As it turns out, we found out some of those changes actually made life easier. Why run over to Target tomorrow to buy a new hair dryer when you can simply go online, order it, and either have it sent to your home in two days or be available for pickup at the curb the next morning? That’s why digital sales for Target doubled. Second, when Target was open last spring and summer, it drew in new customers. Maybe some of them previously went to Macys or Kohls. Some ran right back to their old favorites as they reopened. But some liked the Target experience better.
The bottom line is that Target began to invest significantly in omnichannel before there was a pandemic. Nordstrom did too, but only in a half-hearted way. Target wasn’t alone. Best Buy#, Home Depot#, Lowes#, and Wal-Mart# all did as well. The expenses weren’t trivial. The main competitor, Amazon#, offered great service, two-day delivery and low prices. With the right investments, and they would be large, these big traditional retailers could compete. Amazon wasn’t going to be able to buy a Samsung TV any cheaper than Best Buy. Two years ago, none of the traditional retailers were ready to sell massive volumes online and get them to customers in a timely way. But billions of investment dollars later, they can. And they can go a step further. Not only can they deliver, they can install.
Thus, while Amazon still grows and gains market share, the retailers named above and several others are growing their online businesses even faster. So who loses? The biggest losers have been and will continue to be traditional retailers, especially those without a robust omnichannel presence. Even look at the supermarket. Instacart will select and deliver goods from many markets for a price. Whole Foods (owned by Amazon) will do it directly. There are other chains and third party services as well. If the Acmes of this world want to stay alive, they better invest heavily to stay competitive.
The whole retail world isn’t going online. Excluding gasoline and cars, online sales are now about 20% of the market. They were virtually zero 20 years ago. But people still want to see and touch. Internet retailers are opening physical stores. Amazon is now in malls. So is Peloton, Casper and others. Even Tesla is in malls today. Malls are not dead. But they too must adapt, especially when it comes to storefront delivery of online orders.
The pandemic has accelerated change. Some changes will endure. In some cases we will go back to our old behavior. But let me give another example to ponder. Many restaurants in central business districts, particularly in the colder North, have built elaborate structures for outdoor dining. When Covid-19 fades and indoor dining isn’t scary, there are few who will want to eat dinner dressed in a parka in 20-degree temperatures. But as the weather warms, people will enjoy eating outdoors. Not all these new structures will remain, but some will. Restaurants have also engaged take-out by necessity. Yet it has helped to expand business. Take-out isn’t easy. It complicates operations, particularly at peak lunch or dinner hours. Some menu items lend themselves to takeout better than others. There needs to be a good way for delivery personnel to get to the kitchen without disturbing in-store diners.
You get the picture. When the environment changes, good companies change. Better companies anticipate. They are forward looking. We also learn that change isn’t easy. It can be very expensive. As a result, good companies gain the most share in bad times. Read that sentence again. Because it is true virtually 100% of the time. When housing slumps and money tightens, the one-off spec builder goes back into the home repair business. Big builders have land inventories. So when markets recover, and buyers return, they are ready.
We have all been witnessing major sea changes for years. Streaming, big data, cloud computing, the Internet. Zoom wasn’t invented during the pandemic. Video conferencing has been around for years. But Zoom recognized that ease of use was key and it captured a huge chunk of the consumer market. It is a lot easier to add features to something simple and easy, than it is to strip down something big and complicated. That is beside the fact that stripping down something big and complicated means creating a lower margin product.
For investors, the message is clear. Rapid changes are often necessary for survival. But the big winners are going to be those that (1) see what lies ahead, and (2) have the courage and conviction to invest for that new world. The reason so few companies remain dominant for decades is because their world changes and they don’t. On the other hand, corporate graveyards are littered with those who had great ideas but couldn’t execute. So far this year, just two months old, we have seen over 200 new SPACs raise $63.5 billion. Each SPAC has or plans to buy a young company with a great idea. Some don’t even have revenues yet, just a vision. There will be a few big winners from this universe. Most, however, won’t survive. It’s relatively easy to design an electric vehicle. Making 500,000 and earning a profit is another story entirely. In the 20th century, there were over 3,000 companies created to make cars. Today, there are three, GM, Ford and Tesla, four if you want to count Fiat-Chrysler. You get the picture.
Today, Phil Swift is 60. Who’s he? I am sure you have all seen the Flex-Seal commercials on TV. He is both the spokesman and CEO of the company. I have no idea whether the product lives up to its promises or not.
James M. Meyer, CFA 610-260-2220