How Can Brick and Mortar Retailers Combat Amazon?
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Announced yesterday, Target (NYSE: TGT) plans to join Best Buy (NYSE: BBY) and others with a price-match plan this holiday season. The price-match plan is largely tailored toward drawing customers out of their homes and into stores, and away from online retailers like Amazon.com (NASDAQ: AMZN).
Target’s in-store price match plan will run from Nov. 1 to Dec. 16. The price-matching companies will see margin pressure due to the plan, but the likes of Target and Best Buy would rather see margins compressed than lose customers altogether. This strategy should help these companies salvage some market share that has been lost to Amazon. With smartphones, consumers can now compare prices directly in the store, and in many cases opt to purchase the product from cheaper online retailers. As mentioned, Best Buy recently announced that it plans to price match competitors as well—see our thoughts on whether Best Buy is a good investment as a result.
Best Buy has been on the receiving end of Amazon’s market share infringement, more so than some other retailers. As the nature of Best Buy’s products, consumer electronics puts it in the crosshairs as being a showroom for online retailers. Best Buy does have initiatives that will allow the company to close some of its big box stores and open smaller mobile-focused stores, yet these will take several years. We see the price-match plan and the speculation that Best Buy may roll out its own tablet to compete with the likes of Amazon, Google and Apple as positive signs that the company recognizes a need to act sooner rather than later.
Wal-Mart (NYSE: WMT) is currently holding strong on price matching, with plans to only match local print advertising and not online prices—see our other thoughts on whether you should buy Wal-Mart. Wal-Mart’s geographical diversification continues to help the company perform well, even amidst a poor economic backdrop. Sales are expected to be up 5.5% next year, driven by 8% international growth and 4% in the U.S. Also, the company, even with an already large store footprint, plans to expand square footage by 3-4%.
Though Wal-Mart and Target announced that they have, or will, cease selling Amazon’s Kindle, the company still has robust growth prospects. Even with price matching by the retailers, we believe that Amazon will perform well over the holiday season, as many consumers are just as interested in convenience as they are price. Amazon is expected to grow at a 5-year growth rate of over 30%, well above many of its other e-commerce competitors. The real question is whether Amazon can grow into its valuation; with the company trading at a P/E around 300 we continue to be skeptical.
Sears Holdings Corporation (NASDAQ: SHLD) competes with all the companies previously discussed to some degree. The company’s K-Mart brand has been under severe pressure not only from Target and Wal-Mart, but Amazon as well. Sears is expected to see sales down 6% next year and plans continued store closures. Sears’ primary products, appliances, have been hurt by a weak housing market.
Best Buy continues to have its eyes on the appliance market, and the company has been gaining share in this arena. One positive is that Eddie Lampert continues to have over 40% of his firm’s (ESL Investments) 13F portfolio invested in the company, and as an insider he has the motivation to see a Sears’ turnaround through. As well, the second largest fund owner, Bruce Berkowitz, has almost 15% of his 13F.
The insider sentiment for Target has been predominantly negative of late, with a number of insider sales, but a couple top name fund managers did decide to increase their stakes in the company during 2Q, including Levin Capital Strategies and D.E. Shaw, increasing their stakes 26% and 13%, respectively. Although there was positive fund interest for Target, this is one area that Wal-Mart wins hands down. Wal-Mart calls Warren Buffett as the top fund owner, with George Soros third and Jim Simons fourth.
Some of Target’s key plans for differentiation from Wal-Mart include plans to roll out Wi-Fi in its stores, add fresh foods, offer online ordering with the ability to pick-up in-store, and offer same-day delivery services. We believe that Target has more growth initiatives than its huge retail competitor, Wal-Mart.
By reshaping itself, we believe the company will attract some customers from Wal-Mart, and it will also entice more customers who generally do not shop at either Wal-Mart or Target. Both Target and Wal-Mart are up over 20% year to date, but Target still trades at a trailing P/E of 14 and a forward P/E of 13, compared to Wal-Mart’s trailing P/E of 16. Earlier this month, S&P reiterated its $78 price target for Target, versus the company’s current stock price of around $63. Also, the company pays a dividend that yields over 2%. We like Target as a value-play, but also as a company with growth opportunities.
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This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services recommend Amazon.com, Best Buy, Best Buy, and Wal-Mart Stores. 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.If you have questions about this post or the Fool’s blog network, click here for information.