Evaluating Retail and E-Commerce Growth

May 24, 2020

 

The retail sector has been one of the most saturated topics of discussion in the business world. COVID-19 has been an accelerant toward the inevitable demise of companies like J.C. Penney and other brick-and-mortar counterparts. As a result, certain corporations and sectors are taking significant steps to control an impending shift of preferences among consumers.

 

I will discuss why Off-Price Retailers, Shopify, and Facebook have leverage as economies across the globe are slowly preparing to reopen and e-commerce is beginning to become the new norm. 

 

Off-Price Retailers

Off-Price Retailers focus on acquiring brand-name items that were not initially sold through primary outlets and offering them at a discount. Beyond essential items, goods like clothing and secondary products have seen a decrease in demand. Thus, the market of unused inventory from which Off-Price retailers can purchase will greatly expand in the coming months. 

 

With roughly 38.6 million Americans now unemployed, consumers now more than ever are focused on discounts and favorable prices of everyday items. Consumers who may have previously been indifferent to price and quality will now gravitate toward cheaper items. An emphasized focus on price can flush new consumers to Off-Price Retailers. 

 

TJX Companies (NYSE: TJX) could stand to gain from these factors. TJX posted poor earnings, with sales down roughly 50% and missing expectations by about $540 million in Q1. Despite being down YTD, the stock has gained nearly 45% since late March, when it slowly began to reopen a third of its stores across the nation. Analysts ranging from Credit Suisse to Wells Fargo have upgraded their respective outlooks on TJX, citing that more consumers will shift toward discounted products and markets. Household names like TJ Maxx and Marshalls also give consumer retention for TJX. This is vital for brand differentiation in an era where price would primarily dictate consumer decisions. 

 

Shopify

It is crucial to look at growth in e-commerce beyond Amazon (NASDAQ: AMZN). Shopify (NYSE: SHOP) has begun to establish itself as a formidable competitor in the sector.

 

At its core, Shopify allows small businesses to expand their products online at a low cost. In a current state where small businesses are struggling for innovation, Shopify allows these companies to expand operations with less risk. 

 

Shopify has seen immense growth. Public shares have leaped nearly 102% YTD and almost 200% since last year. Shopify also had a 47% increase in YOY Q1 growth concerning earnings. In terms of consumers, Shopify has subsidiary platforms that are seeing continued growth. Their delivery-tracking app, Shop (formerly Arrive), has grown to over 16 million users since its inception in 2017. According to Dan Runkevicius at ValueWalk, the app has garnered 4 million users during quarantine. 

 

There are concerns with Shopify. Primarily, Amazon's control of the e-commerce market and its ability to derive revenue from other services creates a constant game of catch up for other competitors. Amazon also appeals more to consumers due to its free 2-day shipping and same-day shipping in certain cities with Amazon Prime. Financially, Shopify is very overvalued, trading at nearly 50 times sales with a trailing 12-month PE of 901x compared to Amazon's trailing PE of 117x. Although e-commerce, in general, tends to be overvalued, Shopify may experience a greater decline in the short-term once the sector begins to reach normal market levels. However, long-term, Shopify's unique features for small businesses and continued growth around the globe will be beneficial for overall growth.

 

Facebook

On May 19th, Facebook (NASDAQ: FB) announced its rollout of Facebook "Shops" on Facebook's main platform and Instagram. The feature will allow users to purchase items straight from the app and allow small businesses to create personalized e-commerce sites right on Facebook's platforms. Facebook is also working with Shopify for the backend operations of these sites. Facebook further plans on integrating Shops later on into WhatsApp.

 

This is a massive shakeup in e-commerce. With over 2 billion monthly users across all its platforms, Facebook already has unparalleled consumer retention. According to Deutsche Bank, an e-commerce service on Instagram could garner $10 billion in revenue for Facebook as soon as next year. Facebook's entry into e-commerce also creates revenue diversification and allows for more aggressive shakeups with its current engagement-based advertising model.

 

Beyond financials, Facebook's move into e-commerce is part of a general push toward reshaping its public image. COO Sheryl Sandberg announced last month a $100 million grant for small businesses. Facebook Shops only furthers Facebook's role in a global economic recovery and its impression among small business owners.

 

Still, there are massive concerns for certain stakeholders with Facebook Shops. Given Facebook's mass data breaches in the past, it may be hard for some users to trust the platform to save its financial information. Furthermore, although Facebook could sell more accurate data concerning consumer purchasing habits to its advertisers, users should be wary of how that information is used to target their interests. This becomes problematic for the 2020 election. Certain content can be pushed based on an engagement algorithm that would now include financial behaviors. 

 

Nonetheless, Facebook Shops can be a game-changer due to its convenience and reach and would be a pivotal revenue driver for the company in the coming years.

 

 

 

 

I do not own shares of any of the companies mentioned above. This is strictly my analysis and opinion. Financial actions should not be based solely upon the opinions of one article. Please read my disclaimer for further information.

 

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