Earlier this week, when the National Retail Federation announced that it was raising its holiday sales forecast you probably could have heard a few online retailers snickering off in the corner.
"Six percent sales growth over the 2005 holiday season," the dot-com titans may have said. "Slackers!"
Yes, it's great to see that consumers are in a generous mood as we head into the critical gift-giving season. As long as the shopping binges don't leave us too bloated with fat credit card bills, sales growth at the retail level can be a potent elixir when it's poured in a shot glass and handed to a shaky economy. However, the leading online retailers would be hanging their heads low if they were only looking at 6% top-line growth over the next few weeks. That's because Internet-based storefronts have been nibbling away at traditional retailing's market share for years now.
The U.S. Department of Commerce pegged last year's holiday sales growth at a sharp 6.7%. It was the healthiest spurt since 1999 produced an 8.3% improvement. Indeed, 2004 was a successful year for the country's leading chains, but now let's compare how traditional retailers fared compared to virtual shop smiths.
|
Q4 2004 Sales Growth | |
|---|---|
| Amazon.com | 31% |
| Overstock | 80% |
| Blue Nile | 30% |
| Wal-Mart | 10% |
| Target | 11% |
| Federated | 0.4% |
The e-commerce sector has been a growth stock hotbed for a few years now. Yes, unreal expectations, inflated hype, and flawed business models cost us the initial incarnation of companies like Pets.com and eToys, but those who made it through the feast and famine are feasting again, in many cases with refreshingly robust profitability.
It should come as no surprise that online retailers have been popular selections in our suite of newsletters. Two of the first Rule Breakers stock picks were Blue Nile (NASDAQ:NILE) and Overstock.com (NASDAQ:OSTK). Amazon.com (NASDAQ:AMZN) has seen its stock more than triple since being singled out as a Stock Advisor recommendation two years ago.
What's impressive in contrasting these online leaders to the brick-and-mortar titans is that the offline concepts keep expanding their chains through costly growth efforts -- and they still can't keep pace with the nimbler online merchants. A popular Internet-based shop is a truly scalable business. That's why a company like Amazon can turn a profit while subsidizing the shipping on many of its already marked-down orders these days, whereas it was a sea of red ink just a few years ago.
This doesn't mean that sheer volume is the only thing separating the contenders from the pretenders. Online retail can also be challenging because the competition is just a click away and Web-savvy consumers know about all of the price comparison sites. You either need to have specialized product lines or master the ability to work on tight margins to truly succeed in cyberspace.
One can argue that those ground rules favor the offline chains as they flesh out their online personae, but it's not as simple as that, either. Sometimes having an established offline brand can be a liability on the Internet. There's a conflict of interest, too, as many traditional retailers take a cautious approach to online retailing because they don't want to risk alienating their customer base at their flagship stores by providing Internet users with better deals.
That's why, as surely as the holiday shopping season kicked off this morning with gusto through early-bird sales at the country's leading conventional chains, maybe it's the Internet retailers who should be winning over your investing dollar.
Amazon, Overstock, and Blue Nile are amazing companies with some great stories to tell. Here are some of the smaller chains that are looking to make a virtual difference:
Drugstore.com (NASDAQ:DSCM)
At a post-bubble dot-com reunion, this is one company that is likely to turn the most heads. In theory, it should have gone the way of Kozmo.com or Webvan. The company has struggled in its efforts to turn a profit. Perhaps what kept the company afloat was that it had a friend in Amazon. The world's leading retailer has a 14% stake in Drugstore.com and, until just last month, it helped service Amazon's health and hygiene product orders.
However, Amazon has grown to the point where it can cut out the middleman, even if it has a minority stake in that middleman. Realizing that it is cheaper -- and more effective -- to deal directly with Drugstore.com's suppliers, Amazon has cut the fledgling upstart loose as a retail partner.
This clearly puts the pressure on Drugstore.com to find a way to stand on its own feet and reverse the years of cash-draining deficits. This is clearly a risky stock, and the path to profitability appears hallucinatory at this point.
Baby Universe (AMEX:BUN)
Before Toys "R" Us was acquired, it was clear that its best-performing unit was Babies "R" Us. There is something to be said about catering to baby registry lists and the whims of expectant mothers. Baby Universe isn't the only online concept specializing in clothing and furniture sets for newborns. Companies like BabyStyle.com are there, and most online department store operators, as well as dot-com giants like Amazon serve this niche, too.
Baby Universe went public earlier this year. Yes, it's still a young 'un. However, after posting top-line growth of 48% this past quarter and acquiring profitable rival DreamTimeBaby.com, the company is poised to grow in a highly fragmented sector that is ripe for consolidation.
Hollywood
Media (NASDAQ:HOLL)
Selling Broadway theater tickets online may not seem like much of a strategy, but when you happen to be sitting on the Broadway.com domain (and Hollywood.com, too, incidentally) why not? As popular staged performances begin to make the rounds, Hollywood Media is there for that ideal big-ticket holiday gift (if Blue Nile just seems out of reach). Ticketing makes up 84% of the company's revenues, and with a 52% spurt this past quarter, it may be shareholders who start singing show tunes before long.
Stuffing the stocking with online retailers
Granted, these three small players also happen to be trading for less than $10 a share. They are just that obscure -- and just that risky. So if you're still looking for that perfect bellwether for the season, you may want to aim higher and stay a bit more on the beaten path.
The way folks were swapping Xbox 360 consoles for more than $1,000 apiece earlier this week, perhaps eBay (NASDAQ:EBAY) may be the more intriguing way to cash in on the trend toward holiday shopping migrating online. If there's a hot toy that's hard to find, you know that eBay auctioneers will have it. With eBay's fees tied to final selling prices, a pricey "must have" gift like the Xbox 360 can really throw some seasonal coins into eBay's festive coffers.
So go ahead and stay home today. Heat up yesterday's leftovers and fire up your computer. Wait. You're already online. Perfect! Start clicking. The holiday bargains are everywhere.
Longtime Fool contributor Rick Munarriz has been shopping online over the holidays for about as long as Amazon.com has been in business. He does not own shares in any of the companies mentioned in this story. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
