Does Cyber Monday's Results Change The Game For Retail Investors?

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The Monday after Thanksgiving has become increasingly important as a focal point for online consumer spending. This year’s ‘Cyber Monday’ was recorded as the biggest in history. The widespread use of tablets and smartphones let consumers shop anywhere and anytime, hitting a record spending of around $2 billion; an 18% increase from last year. This growth is a bit faster than general online shopping, which is estimated to be growing 15% annually in the United States.

Should investors scorn traditional retailers and buy web-based retail companies based on this trend? The answer, like many things, depends on the price of a stock. If stocks of traditional retailers are priced as bargains, they are still recommendable. Alternatively, electronic retailer stocks can be overpriced.

Cyber Monday Growing in Importance

Consumers are enjoying the convenience offered by mobile devices more and now they start shopping as early as Thursday evening instead of waiting for Black Friday, a trend which is expected to push online sales to around $43 billion this holiday season. This total would cumulatively make about 10 percent of United States retail spending with the exclusion of food, cars, and gas. As a result, online shopping is emerging as a formidable force in the markets and retailers are now seeking to embrace it.

Retailers have been pushed to pay more attention to the online parts of their business as they are now spending more money on expanding their digital operations. Physical retailers are also shifting their primary focus from drawing customers to stores; to offering comparable online sales to those of e-commerce companies. For instance, Macy’s (NYSE: M) and Nordstrom (NYSE: JWN) are now increasing the size of their cyber footprint despite having solid footing with customers who literally drive to the mall to do their shopping. Nordstrom exhibited this need to widen online customer base by its recent acquisition of online retailer HauteLook.

Analysts think this trend will continue and that traditional brick-and-mortar retail stores may soon be a thing of the past. The notable big gainers on this year’s Cyber Monday were electronic retailers. Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY) saw sales increase by about 42% and 55%, respectively. Amazon’s Kindle e-readers and tablets sales more than doubled from last year. Wayfair, a home goods online retailer, reported a 60% increase in revenue to about $6 million, with mobile sales soaring to 76%. Other gainers included Rakuten, Barnes & Noble (BKS) and Super Fly Sock Monkey. While acknowledging the progress, EMarketer Inc. vice president Clark Fredricksen said, “Mobile commerce as a whole has clearly gone beyond what it’s traditionally been; which is something primarily for the research phase. They’ve extended the length of the shopping day.”

J.C. Penney’s Format Change Issues

The challenges faced by brick and mortar department stores can motivate them to make radical and often damaging changes. Ron Johnson, the Chief Executive Officer of department store J.C. Penney (NYSE: JCP) has instituted many unpopular marketing changes at the company. A comparison can be made to Test Designer, a website used by educators to help formulate tests for students. Test Designer helps users create tests which are formatted in a unique and effective way. Similarly, sales and marking teams compile results of previous ad campaigns to learn which ads work and which do not. Like choosing the right questions to put on a test, marketing teams need to create effective marketing campaigns that resonate with consumers.

The company’s revenues for last three-quarters have declined by over 20% due to sweeping changes made by the firm’s new CEO. These changes have had cascading negative impacts on sales and investor sentiment. More recently, their effects on and employee morale and retention have become any issue.

The company faces many risk factors. First, its customers may continue to rebel against its new marketing and merchandising strategies. Second, recruiting and retaining knowledgeable retail managers has become difficult for the company. Third, it is feared that suppliers and vendors see the company’s problems and will likely demand tougher payment terms.

The company is also taking on a new strategy of decentralized management which could have an adverse impact on the management cohesiveness, morale, communication and efficient decision-making. This would in turn result a negative impact on the company’s operating efficiency. As it stands, the company is operating with fewer officers who have undertaken higher responsibility and duties as others have left the firm.

Oddly, management believes that it can further reduce its workforce in future.

Clearly, J.C. Penney made some difficult choices. Brick and mortar department stores are compelled to make strategic changes to maintain market share. J.C. Penney is now a cautionary tale about making too many changes, too fast, in too many stores at once.

Valuation Considerations

Is the market offering any deals on online or brick and mortar department stores today?

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> <td> <p><strong>P/FCF</strong></p> </td> <td> <p><strong>D/E</strong></p> </td> </tr> <tr> <td> <p><span>KSS</span></p> </td> <td> <p><span>Kohl's</span></p> </td> <td> <p><span>10.07</span></p> </td> <td> <p><span>0.53</span></p> </td> <td> <p><span>1.66</span></p> </td> <td> <p><span>15.6</span></p> </td> <td> <p><span>0.75</span></p> </td> </tr> <tr> <td> <p><span>M</span></p> </td> <td> <p><span>Macy's</span></p> </td> <td> <p><span>11.93</span></p> </td> <td> <p><span>0.56</span></p> </td> <td> <p><span>2.71</span></p> </td> <td> <p><span>12.86</span></p> </td> <td> <p><span>1.25</span></p> </td> </tr> <tr> <td> <p><span>DDS</span></p> </td> <td> <p><span>Dillard's</span></p> </td> <td> <p><span>13.06</span></p> </td> <td> <p><span>0.59</span></p> </td> <td> <p><span>1.88</span></p> </td> <td> <p><span>9.08</span></p> </td> <td> <p><span>0.41</span></p> </td> </tr> <tr> <td> <p><span>EBAY</span></p> </td> <td> <p><span>eBay</span></p> </td> <td> <p><span>17.19</span></p> </td> <td> <p><span>4.84</span></p> </td> <td> <p><span>3.27</span></p> </td> <td> <p><span>29.86</span></p> </td> <td> <p><span>0.23</span></p> </td> </tr> <tr> <td> <p><span>TJX</span></p> </td> <td> <p><span>The TJX Companies</span></p> </td> <td> <p><span>18.06</span></p> </td> <td> <p><span>1.25</span></p> </td> <td> <p><span>8.97</span></p> </td> <td> <p><span>16.05</span></p> </td> <td> <p><span>0.22</span></p> </td> </tr> <tr> <td> <p><span>SKS</span></p> </td> <td> <p><span>Saks Incorporated</span></p> </td> <td> <p><span>23.69</span></p> </td> <td> <p><span>0.52</span></p> </td> <td> <p><span>1.38</span></p> </td> <td> <p><span>22.09</span></p> </td> <td> <p><span>0.33</span></p> </td> </tr> <tr> <td> <p><span>AMZN</span></p> </td> <td> <p><span>Amazon.com</span></p> </td> <td> <p><span>3559.86</span></p> </td> <td> <p><span>1.97</span></p> </td> <td> <p><span>14.95</span></p> </td> <td> <p><span>106.58</span></p> </td> <td> <p><span>NA</span></p> </td> </tr> <tr> <td> <p><span>JCP</span></p> </td> <td> <p><span>J. C. Penney</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.32</span></p> </td> <td> <p><span>1.31</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.85</span></p> </td> </tr> <tr> <td> <p><span>SHLD</span></p> </td> <td> <p><span>Sears Holdings</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.11</span></p> </td> <td> <p><span>1.17</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>1.04</span></p> </td> </tr> </tbody> </table>

Unfortunately, eBay and Amazon are trading at price multiples that are too high for investors to seriously consider. On the other hand, the low price-to-sales and price-to-earnings multiples of Kohl’s (KSS), and Dillard’s (DDS) are cheap enough to warrant consideration.

Macy’s would be an interesting buy candidate if it had less debt. Unfortunately, its debt-to-equity ratio is higher than one, which is usually a cut-off level for value investors. J.C. Penney and Sears are more speculative than even Macy’s since these companies ran losses and absorbed cash over the past year.

Conclusion

Electronic retailing businesses are doing great, but that doesn’t make their stocks great investments. Their bright futures are priced in the stock, and investors would do better to consider Kohl’s or Dillard’s for further research.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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