The holiday season is a crucial time for retailers, delivering a big part of their annual sales and earnings in a matter of weeks. Investors planning to go shopping for high-quality retail stocks before the holidays may want to look at Amazon.com (AMZN -1.64%), Macy's (M -1.52%) and L Brands (BBWI 1.04%).
Amazon is leading the online revolution
Retailers delivered largely disappointing financial performance during the last holiday season. The unusually cold weather was clearly a relevant factor behind lackluster sales data, but the online retail revolution is a much more serious and permanent threat for many brick-and-mortar operators.
According to Starbucks CEO Howard Schultz: "Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. Customers research, compare prices and then bought the brands and items they wanted online, frequently using a mobile device to do so."
Amazon seems to be the clearest beneficiary from this change in consumer habits. The online retail king reported a record-setting holiday season during 2013, with more than 1 million customers around the world joining its Prime benefits program in the third week of December alone. Amazon sold more than 36.8 million items worldwide on Cyber Monday last year, a truly amazing figure of 426 items per second.
Source: Amazon.
When it comes to growth potential and competitive strengths in retail, Amazon is the place to be. The company has increased sales at an impressive rate of 31.2% annually over the last five years thanks to the remarkable advantages produced by its efficient operations and economies of scale.
On the other hand, the company operates with razor-thin margins on product sales, and big investments in areas such as distribution and digital content are putting additional pressure on costs. That means Amazon is losing money at the operating level. For investors who prefer companies making steady and predictable earnings, Amazon might not be the right choice.
Macy's is in fashion
Macy's is doing an impressive job of adapting to key industry trends and evolving consumer needs. The department store chain is clearly moving in the right direction in areas such as merchandising and omnichannel retail capabilities.
Macy's has built fulfillment centers in all of its stores, gaining a lot of flexibility and speed when it comes to delivery of items bought online. The company is also in the early stages of implementing a "click and collect,". but management sounds quite optimistic regarding customer response. Chief Financial Officer Karen Hoguet said in Macy's latest earnings conference call that customers usually buy additional products while they are in the stores to pick up goods purchased online, so new sales channels are increasing traffic and sales at more than one level.
Source: Macy's.
Exclusive collections and private brands are another success driver for Macy's. The company carries exclusive products from highly popular brands such as Tommy Hilfiger and Ralph Lauren. In addition, private brands such as Alfani, Charter Club, and Style & Co resonate well among customers, and they create competitive strength via differentiation.
Unlike Amazon, Macy's generates consistent profits and free cash flow, which management is actively distributing to shareholders. Macy's instituted a 25% increase in dividends for 2014, and the company repurchased approximately 16.3 million shares of common stock for $949 million during the first half of the year.
L Brands: Victoria's profitable secret
Brand power is a key competitive advantage in the fashion and apparel business, and L Brands owns two materially successful brands with Victoria's Secret and Bath & Body Works. At a time in which many competitors are finding it hard to generate any kind of sales growth, the company is producing an impressive financial performance.
L Brands announced a 6.3% increase in sales during the second quarter of fiscal 2014. Total revenue during the period came in at $2.68 billion, better than the $2.65 billion average forecast from Wall Street. In a sign of confidence, management raised its earnings guidance for the full year, from between $3 and $3.15 per share to between $3.03 and $3.18.
Source: L Brands.
Sales in August continued the company's hot streak, coming in at $765.3 million, a 9% increase from $704.7 million in August 2013. Total comparable sales increased 5% year over year.
Performance was strong across the board: Comparable sales increased 5% at Victoria's Secret and 4% at Bath & Body Works, while direct sales grew 8%.
Key takeaway
Retail is a particularly tough and competitive business; for this reason, it's of utmost importance to choose the right names when making investment decisions in the industry. Amazon, Macy's, and L Brands look like strong options for investors willing to make a smart purchase in the retail sector in anticipation of the key holiday season.
