Is the Death of Retail Trade Greatly Exaggerated? Part 16April 17, 2019

by Chuck Carnevaleof F.A.S.T. Graphs

Introduction

Simply Google the phrase “what effect is Amazon having on retail” and you’ll discover a significant amount of information,articles and theories. Personally, I found the following article written by Susan Ward that articulated the sales of brick-and-mortar versus online to be quite illuminating. Her opening paragraph mirrors the title of this article as evidenced by thefollowing excerpt:

“Brick-and-Mortar Stores Versus Online Retail Sales BY SUSAN WARD

Updated December 07, 2018

To paraphrase Mark Twain, “rumors of the death of brick and mortar retail are greatly exaggerated.” Although e-commerceshopping continues to grow rapidly, brick-and-mortar stores are still holding up well versus online retail sites, as manypeople still prefer the in-store shopping experience where they can see and try out products before committing to apurchase.

Brick and Mortar vs Online Sales Statistics

According to U.S. Department of Commerce Statistics:

Total retail sales rose from $3375 billion in 2016 to $3496 billion in 2017, a 3.6 percent increaseE-commerce sales rose from $390 billion in 2016 to $453 billion in 2017, a 16 percent increaseBrick-and-mortar sales rose from $2985 billion in 2016 to $3043 billion in 2017, a two percent increaseAs a percentage of total retail sales, e-commerce sales have risen from 5.1 percent in 2007 to 13 percent in 2017”

To be clear, the Amazon Effect is real as the company has certainly had an impact on both the way and the where Americashops. However, it has not been all negative to all brick-and-mortar retailers. The best retailers are adapting and fightingback. Furthermore, Amazon is not invincible although they have certainly been formidable. The following article excerptfrom Entrepreneur provides a succinct definition of the Amazon effect:

“The Amazon Effect: How E-Commerce Will Change In 2019 And Beyond

What the Amazon Effect Is

So, what is the Amazon Effect? The meaning of the phrase can vary depending on the industry being cited, but it generallyrefers to the difficulty many stores — particularly brick-and-mortar outlets — face when they compete with Amazon. Theonline retailer’s vast selection, fast shipping, free returns, low prices and “Prime” subscription service all serve to createhigh customer expectations for any retailer hoping to compete.

Does that mean Amazon is obliterating the competition? Studies show that Amazon’s success has led to some businessclosures, but many companies, in fact, have tackled the Amazon effect creatively and effectively to compete for customersand hold their ground. In short, the Amazon Effect is just another reason the retail environment is always in flux.”

Additionally, the following links found here and here to articles discussing Amazon and its effect and impact on the retailtrade provides additional insights for those readers that would like to understand the retail situation better.

This final excerpt provides a summary of a Marketplace Plus article summarized by Clark Schultz Seeking Alpha newseditor that further illustrates that although powerful, Amazon is not necessarily omnipotent:

“Amazon brands not dominating as feared

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Mar. 18, 2019 11:42 AM ET|About: Amazon.com, Inc. (AMZN)|By: Clark Schultz, SA News Editor

A study conducted by Marketplace Pulse found that consumers aren’t flocking to buy products from Amazon (AMZN+1.5%) brands, even with the magnitude of the e-commerce giant’s platform and ability to promote itself.

Marketplace notes that the disruption from new Amazon brands in categories such as apparel has been much less thanfeared.

“This idea that Amazon can introduce a product and magically use data to dominate a category is just a conspiracy theory,”says Marketplace Pulse founder Juozas Kaziukenas.”

Regardless of what you believe about Amazon’s long-term effect on the retail trade, my screen of the Retail Trade Sectoras reported by FactSet clearly illustrates that Amazon has had a massive effect on the stock prices of leading retailers. Thereal question is whether this is a permanent trend or a short-term phenomenon that perhaps represents a great buyingopportunity in retail stocks?

Furthermore, although Amazon has clearly influenced retail company stock prices, its effect on operating results is lessuniversal. As I will be illustrating later in this article, many premier retailers are continuing to experience growth in sales,earnings, cash flows and dividends. Therefore, I will leave it up to the reader to decide whether they are currently seeinggreat opportunity in the Retail Trade Sector or great risk. Nevertheless, my own view continues that it is a market of stocksand not a stock market. Furthermore, there exists a lot of diversity in the types of retailers operating in the Retail TradeSector. Consequently, I believe that prudent and discerning investors will find great opportunities in this sector. The trick, asalways, will be to separate the wheat from the chaff.

A Sector By Sector Review

This is part 16 of a series where I have conducted a simple screening looking for value over the overall market based onindustry classifications and subindustry classifications reported by FactSet Research Systems, Inc.

In part 1 found here I covered the Consumer Services Sector. In part 2 found here I covered the Communication Sector. Inpart 3 found here I covered the Consumer Durables Sector and its many diverse subsectors. In part 4 found here I coveredConsumer Nondurables. In part 5 found here I covered companies in the Consumer Services Sector. In part 6 found here Icovered the Distribution Services Sector. In part 7 found here I covered the Electronic Technology Sector. In part 8 foundhere I covered the Energy Minerals Sector. In part 9 found here I covered the Finance Sector. In part 10 found here Icovered the Health Services Sector. In part 11 found here I covered the Health Technology Sector. In part 12 found here Icovered the Industrial Services Sector. In part 13 found here I covered the Non-Energy Minerals Sector. In part 14 foundhere I covered the Process Industries Sector. In part 15 found here I covered the Producer Manufacturing Sector.

In this part 16 I will be covering the Retail Trade Sector.

In each article in this series, I will be providing a listing of screened research candidates from each of the following industrysectors, the sector I’m covering in this article is marked in green:

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Sector 16: Retail Trade

Food Retail

Drugstore Chains

Department Stores

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Discount Stores

Apparel/Footwear Retail

Home Improvement Chains

Electronics/Appliance Stores

Specialty Stores

Catalog/Specialty Dis.

Internet Retail

A Simple Valuation and Quality Screening Process

With this series of articles, I will be presenting a screening of companies that have become attractively valued primarily asa result of the bearish market activities experienced in 2018 from each of the above sectors. I will be applying a rathersimple valuation and quality-oriented screen across each of the sectors. First, I have screened for investment-grade S&Pcredit ratings of BBB- or above. Next, I have screened for low valuations based on P/E ratios between 2 and 17. Finally, Ihave screened for long-term debt to capital no greater than 70%.

By keeping my screen simple, and at the same time rather broad, I will be able to identify attractively valued researchcandidates that I might have overlooked through a more rigorous screening process. In other words, I’m looking for freshideas that I might have previously been overlooking. Furthermore, I want to be clear that I do not consider every candidatethat I have discovered as suitable for every investor. However, I do consider them all to be attractively valued. Additionally,I also believe that every investor will be able to find companies to research that meet their own goals, objectives and risktolerances as this series unfolds.

Portfolio Review: Retail Trade Sector: 16 Research Candidates

FAST Graphs Screenshots of the 16 Research Candidates

The following screenshots provide a quick look at each of the 16 candidates screened out of over 19,000 possibilities.However, there are only 315 companies categorized as Retail Trade, and these 16 were the only ones I was comfortablepresenting in this article. The company descriptions are provided courtesy of the Wall Street Journal. In the FAST Graphsanalyze out loud video that follows the screenshots, I will provide additional details and thoughts on the possibleattractiveness as well as the potential negatives of each of these research candidates.

AutoNation Inc (AN)

AutoNation, Inc. engages in the provision of automotive products and services. It operates through the following segments:

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Domestic, Import, Premium Luxury and Corporate and Other. The Domestic segment comprises retail automotivefranchises that sell new vehicles manufactured by General Motors, Ford and Chrysler.

The Import segment includes retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda,and Nissan. The Premium Luxury segment consists of retail automotive franchises that sell new vehicles manufacturedprimarily by Mercedes-Benz, BMW, Audi, and Lexus. The Corporate and Other segment involves in the collision centres,auction operations and stand-alone used vehicle sales and service centres.

The company was founded by Steven Richard Berrard and Harry Wayne Huizenga Sr. in 1991 and is headquartered inFort Lauderdale, FL.

Best Buy Co (BBY)

Best Buy Co., Inc. provides consumer electronics, home office products, entertainment products, appliances and relatedservices. It operates through two business segments: Domestic and International. The Domestic segment is comprised ofthe operations in all states, districts and territories of the U.S., operating under various brand names, including but notlimited to, Best Buy, Best Buy Mobile, Geek Squad, Magnolia Audio Video, Napster and Pacific Sales.

The International segment is comprised of all operations outside the U.S. and its territories, which includes Canada,Europe, China, Mexico and Turkey. It also markets its products under the brand names: Best Buy, Audio visions, Best BuyMobile, The Carphone Warehouse, Five Star, Future Shop, Geek Squad, Magnolia Audio Video, Napster, Pacific Salesand The Phone House.

The company was founded by Richard M. Schulze in 1966 and is headquartered in Richfield, MN.

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Big Lots Inc (BIG)

Big Lots, Inc. engages in the operation of retail stores. It operates through the Discount Retailing segment which includesmerchandising categories such as furniture, seasonal, soft home, food, consumables, hard home, and electronics, toys,and accessories.

The company was founded by Sol A. Shenk in 1967 and is headquartered in Columbus, OH.

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Capri Holdings (CPRI)

Capri Holdings Ltd. engages in the design and distribution of sportswear, accessories, footwear and apparel of brandedwomen’s apparel and accessories and men’s apparel. The firm operates its business through three segments: Retail,Wholesale and Licensing. The Retail segment operates collection stores, lifestyle stores, including concessions and outletstores located primarily in the United States, Canada, Europe and Japan.

The Wholesale segment sells the company’s products to department stores, as well as specialty retail stores and travelshopping locations. The Licensing segment licenses its trademarks on products such as fragrances, cosmetics, eyewear,leather goods, jewelry, watches, coats, men’s suits, swimwear, furs and ties.

The company was founded by Michael David Kors on December 13, 2002 and is headquartered in London, the UnitedKingdom.

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Canadian Tire Corp (TSE:CTC.A)

Canadian Tire Corp. Ltd. operates as a general merchandise retailer for gasoline, automotive, sports and home products.The company operates through three segments: Retail, CT REIT and Financial Services. The Retail segment comprises ofthe living, playing, fixing, automotive, seasonal & gardening, apparel and sporting goods categories.

The Financial segment services markets a range of Canadian tire branded credit cards, including the Canadian tire optionsmastercard, the cash advantage mastercard, the gas advantage mastercard and the sport chek mastercard. Financialservices also markets insurance and warranty products. The CT REIT segment involves owning, developing and leasingincome-producing commercial properties.

Canadian Tire was founded by Alfred Jackson Billes and James William Billes in September 15, 1922 and is headquarteredin Toronto, Canada.

CVS Health (CVS)

CVS Health Corp. engages in the provision of health care services. It operates trough the following segments: PharmacyServices, Retail or Long Term Care, Health Care Benefits and Corporate. The Pharmacy Services segment offerspharmacy benefit management solutions. The Retail or Long Term Care segment includes selling of prescription drugs andassortment of general merchandise.

The Health Care Benefits segment offers traditional, voluntary and consumer-directed health insurance products andrelated services, including medical, pharmacy, dental, behavioral health, medical management capabilities. The Corporatesegment involves in providing management and administrative services.

The company was founded by Stanley P. Goldstein and Ralph Hoagland in 1963 and is headquartered in Woonsocket, RI.

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Nordstrom Inc (JWN)

Nordstrom, Inc. engages in the manufacture and trade of clothes, shoes and accessories. It operates through the followingbusiness segments: Retail, Credit and Corporate/Other. The Retail segment manages physical stores and online shops.The Credit segment offers a range of payment options to customers. The Corporate/Other segment includes sales returnreserve, expenses, and assets.

The company was founded by John W. Nordstrom in 1901 and is headquartered in Seattle, WA.

Kroger (KR)

The Kroger Co. engages in the operation of retail food and drug stores, multi-department stores, jewellery stores, andconvenience stores. It also manufactures and processes some of the food for sale in its supermarkets. The combinationfood and drug Stores are the primary food store format. The multi department stores sells a wide selection of generalmerchandise items such as apparel, home fashion and furnishings, electronics, automotive products, toys and finejewellery.

The marketplace stores offer full-service grocery and pharmacy departments as well as an expanded general merchandisearea that includes outdoor living products, electronics, home goods and toys. The price impact warehouse stores offer a‘no-frills, low cost’ warehouse format and feature everyday low prices plus promotions for a wide selection of grocery andhealth and beauty care items.

The company was founded by Barney Kroger in 1883 and is headquartered in Cincinnati, OH.

Kohl’s (KSS)

Kohl’s Corp. owns and operates family-oriented department stores. It offers exclusive brand apparel, shoes, accessoriesand home & beauty products through its department stores. Its stores offer apparel, footwear and accessories for women,men and children; soft home products, such as sheets and pillows and house wares targeted to middle-income customers.Its stores generally carry a consistent merchandise assortment with some differences attributable to regional preferences.

The company was founded in 1962 and is headquartered in Menomonee Falls, WI.

Loblaw Cos Ltd (TSE:L)

Loblaw Cos. Ltd. is a food retailer, which engages in the provision of drugstore, general merchandise, and financialproducts and services. It operates through the following business segments: Retail and Financial Services. The Retailsegment consists of retail food and Aasociate-owned drug stores, and also includes in-store pharmacies and other healthand beauty products, gas bars and apparel and other general merchandise.

The Financial Services segment offers credit card services, loyalty programs, insurance brokerage services, personalbanking services provided by a major Canadian chartered bank, deposit taking services and telecommunication services.

The company was founded in 1919 and is headquartered in Brampton, Canada.

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Macy’s Inc (M)

Macy’s, Inc. engages in the retail of apparel, accessories, cosmetics, home furnishings, and other consumer goods. Itsbrands include Macy’s, Bloomingdale’s, and Bluemercury. It offers men’s, women’s, and children’s apparel, women’saccessories, intimate apparel, shoes, cosmetics, fragrances, as well as home and miscellaneous products.

The company was founded by Rowland Hussey Macy Sr. on March 6, 1929 and is headquartered in Cincinnati, OH.

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Target Corp (TGT)

Target Corp. engages in owning and operating of general merchandise stores. It offers curated general merchandise andfood assortments including perishables, dry grocery, dairy, and frozen items.

The company was founded by George Draper Dayton in 1902 and is headquartered in Minneapolis, MN.

Tapestry Inc (TPR)

Tapestry, Inc. engages in the provision of luxury accessories and lifestyle brands. It operates through the followingsegments:Coach, Kate Spade, and Stuart Weitzman. The Coach segment consists global sales of coach brand products tocustomers through coach operated stores, including the internet and concession shop-in-shops, and sales to wholesalecustomers, and through independent third party distributors.

The Kate Spade segment focuses in the kate spade new york brand products to customers through Kate Spade operatedstores. The Stuart Weitzman segment comprises Stuart Weitzman brand products primarily through Stuart Weitzmanoperated stores.

The company was founded by Dawn Hughes in 1941 and is headquartered in New York, NY.

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VipShop Holdings (VIPS)

VipShop Holdings Ltd. engages in the provision of online products sales and distributions services. It offers womenswear;menswear; footwear; accessories; handbags; apparel for children; sportswear and sporting goods; cosmetic goods; homeand lifestyle products; luxury goods; and gifts and miscellaneous. It cooperates with domestic and overseas brand agentsand manufacturers.

The company was founded by Ya Shen and Xiao Bo Hong on August 22, 2008 and is headquartered in Guangzhou, China.

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Walgreens Boots Alliance (WBA)

Walgreens Boots Alliance, Inc. engages in the provision of drug store services. The company operates through thefollowing segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. The RetailPharmacy USA segment engages in pharmacy-led health and beauty retail businesses, which sells its products underbrand names Walgreens and Duane Reade.

The Retail Pharmacy International segment offers retail stores, which sells products of brands No7, Boots Pharmaceuticals,Botanics, Liz Earle, and Soap & Glory. The Pharmaceutical Wholesale segment supplies medicines, other healthcareproducts and related services to pharmacies, doctors, health centers, and hospitals.

The company was founded in 1901 and is headquartered in Deerfield, IL.

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Weston George (TSE:WN)

George Weston Ltd. engages in the food processing and distribution of fresh and frozen baked goods and other foods. Itoperates through the following segments: Weston Foods, Loblaw, and Other and Intersegment. The Other andIntersegment is comprised of intercompany revenue elimination, trust unit distributions, effect of asset impairment, andeffect of foreign currency translation.

The company was founded by George Weston in 1882 and is headquartered in Toronto, Canada.

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F.A.S.T. Graphs Analyze Out Loud Video:

Summary and Conclusions

As previously stated, the Retail Trade Sector has a long legacy of being influx. Before we had Amazon and its online sales,we had category killer Walmart. In hardware stores, we had Home Depot and then Lowe’s. Today, we not only haveAmazon, but we have the disruptive potentiality of e-commerce in general. Consequently, I believe it is undeniable andcrystal clear that the retail industry is changing. However, it is also true that best-of-breed retailers are also adapting and aspreviously stated fighting back with their own e-commerce offerings, etc.

Personally, I believe there is room for both brick-and-mortar and e-commerce retailing. Furthermore, I believe that the twoconcepts working in tandem are more likely to survive than either as standalone operations. Additionally, certain types ofretail are more vulnerable than others. Nevertheless, evolution and even revolution in retail concepts and strategies aresimply the norm. Much of what is happening in retail today would have been unthinkable even a few years ago. Therefore,who’s to say that a future disruptor may not be just over the horizon? Perhaps a Star Trek replicator? We already have 3Dprinters. Nevertheless, I do believe that retail is here to stay. Furthermore, I continue to believe that best-of-breed retailerscontinue to have a future. Caveat emptor.

Disclosure: Long CVS,KR,TGT,TPR,WBA.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construedas a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of thecompanies discussed may not continue and the companies may not achieve the earnings growth as predicted. Theinformation in this document is believed to be accurate, but under no circumstances should a person act upon theinformation contained within. We do not recommend that anyone act upon any investment information without firstconsulting an investment advisor as to the suitability of such investments for his specific situation.

© F.A.S.T. Graphs

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