Christmas is here again and shoppers will be flocking to the usual big-name suspects for their holiday shopping. Price-conscious shoppers hunting for door-buster deals and blowout savings will set their eyes on discount stores, both online and traditional brick-and-mortar types, such as Amazon.com (NASDAQ:AMZN), J.C. Penney, and Best Buy, as well as a host of other household names.
Investors in the retail space, however, won't be shopping for great Christmas bargains only, but also for businesses that will continue to deliver the best bang for their buck in 2014. Amazon has always been an attractive proposition primarily due to its wild revenue growth. The $61 billion in sales-a-year online retailer has been growing its revenue at a blistering 32.7% annual clip that belies its huge size. Its share price has also grown admirably: the stock was in the low $50's exactly five years ago, but right now it's trading at slightly more than $400 -- that's a gain of 700% in five years.
Amazon is a fine case study in mutual inscrutability, building a reputation as the ultimate disruptive force in the retail landscape, an art it has perfected through cutting prices to the bone and surviving on razor-thin margins. Its extremely pricey valuation also requires a leap of faith for new investors looking to open positions in the stock.
There are very few retailers that seem to be resistant to the Amazon onslaught. Investors interested in investing in the retail industry are best advised to perform due diligence and gauge how susceptible their companies of interest are to the retail giant.
Mark Miller, a William and Blair analyst, has for the last two years been studying retailers that seem to have credible defenses against Amazon. Miller, together with his colleagues, has been collecting massive swathes of data on a monthly basis from the websites of 40 large retailers. The data points of interest in their study include checking the degree of product overlap between the retailers and Amazon and other factors that would normally be overlooked in a typical analysis by securities analysts. Mark and his friends have been trying to calculate how vulnerable a particular retailer is to Amazon by using a number of functions with different weights assigned as follows:
- 40% based on comparative prices,
- 40% based on a favorable shopping environment
- 20% based on the degree of product overlap
Using the data collected, retailers such as TJX Companies (NYSE:TJX), Walgreen (NASDAQ:WBA), and Cabela's (NYSE:CAB) have come out on top as the retailers least susceptible to ceding market share to Amazon.
Walgreen has a 49% product overlap with Amazon. Its merchandise is on average 17.2% more expensive than Amazon's. Among the 40 retailers studied, TJX Companies have the lowest product overlap with Amazon at just 17%. Its products are on average 24.3% pricier.
Cabela's products are the least expensive compared to Amazon's. The specialty retailer's goods are just 12.2% more costly than Amazon's, with a 35% product overlap.
These versatile retailers have outperformed the S&P 500 index over the last two years.
In the six months following the May study, TJX Companies, Walgreen, and Amazon all recorded sizable gains in their share prices. Amazon's share price was up 17.7%, Walgreen rose 10.07%, while TJX Companies gained 10.2%. Cabela's shares tanked a surprising 10.2%. For comparison purposes, the broader S&P 500 rose marginally by 1.2% in a similar time frame.
Budding greenhorns showing promise
There are other not so well known upstarts that could also possibly give Amazon food for thought in the not too distant future. For instance, Groupon connects merchants to customers through its local commerce marketplace and its discounting business model. Although the company has of late been struggling with its popular ''daily deals'' model in the face of stiff competition from RetailMeNot and Google, its Groupon Goods Service has been bringing home the bacon.Groupon now sells directly to its customers. Groupon's stock has gained close to 140% in the last 12 months.
Blue Nile is probably much less known to the average investor than Groupon, since it primarily focuses on the luxury-goods niche. It's also a small company with a $614 million market cap. Blue Nile is one of the few companies that have been trying to exploit vastly improved online security by selling high-end goods via the web.
The luxury-goods sector remains free from the over-cannibalizing that is rampant in other sectors, thanks mainly to its robust customer service that has always ensured customers are not scammed with fake or lower-end merchandise. The company's bold online model is still quite utopian, but might become widely accepted and appreciated by consumers a few years down the line.
Amazon is likely to remain the most dominant online retailer for many years to come. Although its lack of decent profits is a bit worrying, its investors have been willing to overlook that and have steadily bid up its price based on the firm's robust revenue growth.
Powerful and disruptive as Amazon is, it is likely to face growing competition from the likes of TJX Companies, Walgreen, and Cabela's, companies that seem to be withstanding its onslaught amazingly well.
Fool contributor Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Blue Nile. The Motley Fool owns shares of Amazon.com. 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.