Don't Give Up on Brick and Mortar

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Amazon (NASDAQ: AMZN  ) is firing on all cylinders, and Bezos' e-commerce behemoth will roll over any brick-and-mortar retailer that stands in its way... right?

Amazon's net sales in the company's first quarter were up about $2.02 billion, or 22%. Meanwhile, some brick-and-mortar retailers are struggling to grow their top line, and Amazon is likely at fault (or at least partly). Best Buy (NYSE: BBY  ) , for instance, saw revenue decline 9.6%, and comparable-store sales fall 1.3% from the year-ago quarter. Amazon rival Barnes & Noble continues to face rough waters; revenue continues to slide, and the company's CEO recently resigned.

For brick-and-mortar retailers in Amazon's lane, all is lost -- or so it seems. Is there any hope for Amazon competitors? Possibly. Are brick-and-mortar retail stocks competing with Amazon all a dangerous bet? Not necessarily.

A look at Amazon competitors Best Buy and Wal-Mart (NYSE: WMT  ) reveals some promising numbers.

Leveling the playing field
Believe it or not, Best Buy's stock has trumped Amazon's over the past 12 months, up 50% compared to Amazon's 41% gain. Year to date, Best Buy is up 140%, compared to Amazon's 23% gain. With Best Buy's revenue down, and Amazon's substantially higher, how is this possible? Expectations.

The stock market is all about expectations. If the market expects a business to perform exceptionally well, investors buy up a stock until the buoyant expectations are priced into the stock. Conversely, when investors expect a business to perform poorly, the stock sells off until poor expectations are priced into the stock.

In other words, valuation matters. That's the first reason investors shouldn't give up on brick-and-mortar retail stocks. Greatness is already priced into Amazon's stock. The stock trades at 2.2 times sales. Comparatively, Wal-Mart trades at .6 times sales.

Amazon's price-to-earnings and price-to-free cash flow ratios aren't even meaningful. Quarter after quarter, the company barely slips by with a profit -- sometimes reporting losses. Even worse, in the last thee years, the company's cumulative free cash flow is actually negative.

While investors wait for Amazon to bring in the dough, Best Buy and Wal-Mart both trade at realistic valuations, with free cash flow yields of about 4.5%. Amazon's free cash flow yield? Just 0.13%. Amazon investors obviously expect a very bright future for the company.

Sure, Amazon may grow into its valuation. But Best Buy and Wal-Mart may also outperform their low expectations. Valuation, therefore, levels the playing field.

Where's the money?
Yes, Best Buy's revenue is down this year. But the company is still generating a large amount of cash. Over the trailing 12 months, Best Buy raked in $564 million in free cash flow. Amazon? Just $177 million. That's a paltry number in light of the company's $140.5-billion market cap. (Best Buy's market cap stands at just 9.7 billion.)

How's Wal-Mart faring? Trailing 12-month revenue is at an all-time high. Even better, the company generated a meaningful $11.56 billion in free cash flow in the last 12 months.

It's not the end
Does this mean that Wal-Mart and Best Buy are better investments than Amazon? Not necessarily -- but don't count brick and mortar as dead yet. As an article in The Economist eloquently explained, there are still indications that brick and mortar has a chance against e-commerce:

Bricks-and-mortar retail may be losing ground to online shopping, but it remains more profitable. The physical world is also increasingly capable of taking the fight to its online competitors. Last year online sales of shop-based American retailers grew by 29%; those of online-only merchants grew by just 21%.

Keep your eyes peeled for brick-and-mortar investment opportunities. Sometimes, the greatest investments are found in unloved sectors.

Don't forget about dividends
One of the fortunate benefits of investing in stocks with low expectations is often their meaningful dividend yields. This holds true for both Wal-Mart and Best Buy. If you're on the lookout for high-yielding stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.

Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2013, at 2:57 AM, Secs27 wrote:

    Amazon has horrendous customer service. Prime is a rip off. Why pay$79 per year when nearly every vendor offers free shipping.

    Amazon has some of the mist expensive pricing on the Internet. A Generac 6244 generator is $4497 plus tax on amazon($4800). has it for $4196 with free shipping and no sales tax. That's a $700 savings. A new HP printer cartridge is $44.74 plus $15 shipping on amazon(3p not eligible for prime)

    I bought it at for $37,44 with

    Free shipping and no sales tax. 70% less than amazon

    On just two items I saved over $700 by smarter shopping and avoiding amazon. Last year I saved over$13,000,00 on my Internet purchases by avoiding amazon and shopping smarter checking pricing elsewhere.

    If you love to get ripped off, then amazon is for you.

  • Report this Comment On October 31, 2014, at 11:59 AM, monican2 wrote:

    It's certainly true that brick-and-mortar retailers need to lower prices and increase service quality to compete with giants like Amazon.

    By the way, here's a comparable generator to the 6244 at an even better cost :)

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