Christmas creep has been happening for years. A shopping season that used ro kick off on Black Friday — the Friday after Thanksgiving — took over the entire month of November and that was before the pandemic made crowding in stores a very bad idea. Now, the holiday shopping season began in October. It has been a rolling set of deals designed to spread out spending since, in theory Black Friday, Cyber Monday and the traditional big shopping days won’t deliver the same dollars they did in past years.

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The reality is that buying patterns have shifted but Black Friday and Cyber Monday also delivered. It has been a confusing time for shoppers and one that has produced clear retail winners and losers.

7investing CEO Simon Erickson is joined by Lead Advisor and retail expert Dan Kline to break down the 2020 holiday shopping season. They discuss which companies have crushed the season and which ones are in real trouble. They also break down how the shipping industry has responded to the unique challenges that 2020 has offered.

 

Interview timestamps:

Introduction: 0:00

Looking at sales numbers: 1:40

How are people actually shopping?: 2:29

What is a digital sale: 4:39

Investing takeaways from the holiday shopping season: 5:43

More on big winners: 7:40

Under-the-radar winners: 9:18

Shopify vs. Amazon: 10:53

More under-the-radar stocks: 13:05

Shipping and online sales: 14:40

More on shipping and logistics: 19:17

One more surprise winner: 21:18

Wrapping up and wish lists: 22:05

Transcript:

Simon Erickson  0:00

Hello, everyone, and welcome to our 7investing podcast. My name is Simon Erickson and on today’s show we’re going to be taking a deep dive looking in closer at holiday retail sales. And I’m so fortunate to be joined by my fellow lead advisor at 7investing Dan Kline. Dan, welcome to the program. Are you ready to talk about retail here today?

Dan Kline  0:18

I’m ready. Simon, this has been a weird holiday season. So normally on Black Friday for the past six years, that’s a day where I’m doing interviews all over the world. Last year I was on in England I was I was on in Australia like and talking about that special day like what’s and none of that happened this year. And it’s not because people didn’t want to talk to me, it’s because Black Friday felt like a moving target. And the reality is it was still a giant sales day.

But because you didn’t have the visuals, you didn’t have the people lining up at five in the morning, you didn’t have fistfights over a 6- inch television or a Hatchimal or, or whatever the you know, the the toy of the moment was, it was a very different day. And honestly, I went to Target to get some paper towels later in the afternoon like it, it was not normal and even being there. There were absolutely a lot of sales. But I’m not sure it felt that different than it did a week before or a week after. So in a very different holiday shopping experience for me this year.

Simon Erickson  1:17

Well, let’s dig into some of those trends and some of those numbers and how it’s different this year. But first and foremost, I think this is kind of fun, because you are normally the host of our 7investing Now livestream show, we’re flipping the script on you here. Now you’re actually going to be filling in as the lead advisor who’s going to give us some commentary on what we’re seeing in the retail industry right now.

Dan Kline  1:34

I’m happy sitting in either chair, but it is a little bit weird for me not to be running the board.

Simon Erickson  1:40

Well, let me keep you up with some higher level numbers. First, the retail. The National Retail Federation forecasted that holiday sales are in November and December will increase between 3.6% and 5.2% over last year to a total of around $750 to $770 billion. This excludes automotive dealers, gas stations and restaurants. Compared to last year, those are kind of up 3 or 4%. But they’re expecting that online and other non-store sales, digital online shopping things like this will increase between 20 and 30% over last year to $200 to $220 billion. And so far, those predictions seem like they’re pretty accurate and correct so far, Dan, this is a pretty indicative, it seems at least on the numbers, that online sales are here to stay. But what changing patterns are you seeing in retail right now and how people are actually shopping.

Dan Kline  2:29

So it’s been a very strange holiday in that everything has changed and nothing has changed. So if you look so you have to throw out Thanksgiving, Thanksgiving was traditionally a big at least for the past, like two or three years, stores opened after dinner or late in the afternoon, there was sort of early Black Friday shopping at the big box stores.

That didn’t happen at all this year, all those stores were closed. Black Friday, you actually and Cyber Monday you did see increases. So you would think if those days are as big as ever, but people were doing some of the shopping online, well, the rest of the month would be slower. But here’s the reality, every day is kind of been good. They’ve spread out the season. So there was absolutely some habit shopping on Black Friday on Cyber Monday where people were are more than happy to go online and some did go to stores, there just wasn’t the concentrated rush of going to store so so what’s the changing pattern, the changing pattern is that before we entered this, that digital sales are about 13 and a half percent of all sales.

At the peak of the pandemic, they’ve come about 20% I think we’re gonna see post pandemic, they’re gonna be like 15 or 16. But something like a Black Friday, they’re gonna rise to 20 that that you’re just not gonna want to deal with like the weights like you remember the days when you had to get an iPhone yet to go to the Apple Store and waiting a long line. And then we all went, why are we doing this? I’ll just preorder it from T Mobile, and I’ll get it like 48 hours later. That’s kind of what’s happening. The other thing that’s become really difficult for consumers is when am I getting the best price? You don’t know. So it’s really just about getting a good price. So we’ve seen two big trends. People have been shopping since October. So it’s spreading out the whole season. But they’re not forgetting those big days. And as we start to see numbers come out from Cyber Monday, I think you’re going to see things like what sold big Apple products sold big Amazon-owned products, everyone would habitually knew that’s the best day of the year to buy an Echo or whatever.

Doesn’t mean the sales aren’t good, right? But the prices aren’t good right now. But the prices were best then. So we saw everything stayed the same. And everything changed. The other thing we’re also going to get a little bit squishy on is Simon what’s a digital sale?

So, you do all your homework on your phone. And then you place the order for curbside pickup or to pick up at the kiosk and Walmart or the service desk at Target. Was that an online sale? Was it a physical sale like I think omnichannel we’re going to need to start breaking that out people like what if I go to Best Buy and I do all my homework on what TV to buy and standing in the store I ordered on my phone for home delivery. Now sometimes I might order it from somebody else for home delivery. But let’s say I order it from Best Buy. I think the categorizations we’ve been using probably don’t mean as much anymore because I know I do a lot of research on my phone, and then sometimes just drive over to Target to pick things up.

Simon Erickson  5:19

That makes a lot of sense we kind of obsess over online shopping or what percent is e-commerce shopping. But in reality, that kind of virtual seamless experience between the store itself and where people actually placing the orders doesn’t really matter. It’s all of retail at the end of the day. Dan, we’re an investing show here. We’ve got a podcast, it’s for investors, what are some of the investment investing takeaways that you see from those habits that are changing out there?

Dan Kline  5:43

So you’ve heard me say this before, but this is a winners keep winning scenario. In past holidays. If you were let’s say a struggling mall retailer, Dillards or J.C. Penney, in theory, you had the ability to have a good holiday season, because people came to the mall anyway, they’re probably going to visit your store if you had merchandise that entices them. So there was always surprises.

There will be no surprises this year. Shopping is much more focused. I know like I went to the mall I went to Lenscrafters to pick up these glasses the other day. And sure I walked through the mall and I could have gone other places right now. Are you really going other places? Are you really mall shopping the way you used to you kind of just meander around the mall like normally I would never walk by GameStop without stopping in GameStop. But GameStop can only have five people in at a time and it seemed almost like piggish for me to like take up one of those spots when I probably wasn’t going to buy something.

So does that hurt all of those other stores? It absolutely does. So who’s gonna win? Walmart’s gonna win? We’re going to Walmart anyway, they’ve got they built the infrastructure. And I think infrastructure is probably the most important word to remember. You know, everyone said, well, geez, Amazon spending all this money on on on same-day and one-day delivery to kind of up the ante. Is that necessary?

Well, it’s proven very necessary this holiday season. So you know, the biggest winner of all is going to be Amazon following them, I think is going to be Target and we’re not talking a lot about Target, but Target has amazing same-day delivery ability through Shipt, which they own.

That also gives them some exposure to delivery for CVS and other places where they’re partnered, which is going to be a big driver, a lot of people are going to be signing up through one company, maybe through Costco or through CVS, and then go Oh, wait a minute, I get access to Target. That’s kind of like a little below the radar because we don’t they might not be the best in terms of digital fulfillment compared to Amazon and Walmart.

You know, Lowe’s is a big winner home improvement in general. But what Lowe’s did and it’s really smart is they went okay, people are coming to Lowe’s. What else can we sell them? Oh, they want exercise bikes and treadmills. Okay, let’s get that. So there’s a lot of merchandise at your Lowe’s that wouldn’t normally be there that’s out of stock other places.

So, they basically looked at like, Alright, people want paper towels and toilet paper, let’s order more paper towels and toilet paper, let’s get what they need. Best Buy is going to be a big winner. Now, that’s a really well run company, that would have been a mild winter anyway, they’re gonna be a huge winner, because Simon we both have kids mine much older than yours. Well, I had to buy my son a new laptop, because he was schooling from home. And even when he’s in school, he’s on a computer a lot of the time because he’s physically there, but most of his classmates are not. So they’re doing things virtually an awful lot of laptops, the other thing we have, that’s going to help Best Buy and probably is going to help GameStop is we’re the beginning of a new console cycle. So that you know, doesn’t make GameStop a winner by any means it’s that’s what I would I would stay away from it is probably going to make their Q4 and Q1 results look really, really good.

Be wary of that those are low-margin one time purchases, we are not necessarily seeing a game cycle that’s going to make them winners, those very much could be digital downloads. And one of the Xbox actually doesn’t even have a CD drive. So be really careful about that. But the companies that spent money on logistics on warehousing and getting you items, those are going to be the winners. And you know, you kind of can’t go wrong with playing it big when it comes to retail right now.

Simon Erickson  9:18

Infrastructure. That’s the word that I took away from that last that last discussion you had there, Dan, of course, retail is driven by transactions. And there have been companies that have the obvious winners that have invested in getting those transactions as quickly and conveniently as possible to retailers. But then I could have told you Amazon and Target and Walmart were going to be really big winners from retail up. What are some of the under the under the radar companies or is there anything that’s less obvious that you see going on in retail that you’ve got your eyes on right now?

Dan Kline  9:44

So there are a couple that I know are winners. And there are a couple that I think could be. Shopify, I’m pretty sure is a big winner, because every purchase I’ve made this year that was through a platform that wasn’t Amazon, which usually means Facebook or Twitter, you know someone suggests something I do my homework on whether it’s a real product, I then buy a $150 coffee maker.

Shopify has been the fulfillment on that every single time. So I think there push at being a behind-the -cenes processor. And again, it’s a logistics play. I like Shopify as a platform to build a store. That to me is ephemeral that can go away in a heartbeat, Google could spin something up and suck in your Shopify site. What Google can’t do is build warehousing and trucking, and all of those different logistics. So I have the Shopify app, and I’ve never directly made any intention of dealing with Shopify. Because I have three or four things that I ordered one one view of television commercial, I bought a video doorbell and off-brand video doorbell because I saw a TV commercial, like an infomercial kind of thing. And it’s being fulfilled by Shopify. So I think there’s that the other one that I’m pretty sure.

Simon Erickson  10:53

We change topics on that one. Did you have thoughts about Shopify versus Amazon? I mean, I people like to compare and contrast these two companies, you have opinions about the two of them. Is Shopify displacing Amazon, are they both winners separate from one another? How do you have that relationship?

Dan Kline  11:07

They’re winners separate from one another. So Shopify is displacing every other service like that, that, you know, so you’d sign up with whatever ISP you know, you know, whatever Namecheap or, or whoever it is GoDaddy, and you’d then get like their store, or you’d use a WordPress plugin, or whatever it is to be a store. Shopify is becoming the default for that. We’re like, why would I use something standalone when there’s a decent chance my customers already have a login here?

Amazon tried to do that. And retailers went, why would I let Amazon have access to what I’m selling? Shopify doesn’t sell stuff. So let’s pretend for charity, we were going to sell  7investing mugs. But we didn’t want Amazon to know who our customers were, Shopify would be the clear winner there, because we’re not competing with them for sales. Not that in our case of charity mugs, we’d really be competing for sales. But you know, it’s a silly example. But they’re totally agnostic.

So, all those other things. I mean, remember when Yahoo Sitebuilder was the default store, and you had to do things like go out and get like, you know, your own payment processing? And it was like, No, it wasn’t that long ago was 10-12 years ago, when I ran the toy store and setting up an online store, we tied it in with our QuickBooks point-of-sale system. And it was like a monthlong process of approvals and permissions and how the credit cards get processed.

With Shopify, like that’s like signing up for a library card or like it is real. That’s a weird example. It is really, really simple. So I think they will aggregate all the other market share eventually. And for anyone who wants to ask, you know, well, what about Big Commerce? I am super against the me too plays in the space where having volume matters. So if I’m, if I’m going to start a store, and I know that 50% of the non-Amazon audience already has a Shopify login, why would I go to another platform? So Big Commerce might have its minor little deals? don’t invest in the second right place?

Simon Erickson  13:05

Perfect, perfect. Okay, so I’m keeping my eyes on Shopify, Dan. And those 7investing mugs truly are a hot commodity out there. But what was the other under-the-radar company? I apologize for cutting you off? What was the other company or one image in there?

Dan Kline  13:16

Five Below. So So this is, it’s a fun shopping experience. So I question in a pandemic, if people are shopping there as often, but my guess is, all your stocking stuffers are coming from Five Below that, that if you have kids ages, I don’t know five to 20, that you’re going to go in there. And while you previously might have made five trips and spent $10 a trip, you might make two trips and spend $50 a trip but you’re going in and you’re buying your iPhone chargers, your yoga mats, your Big League Chew, like, like all the ridiculous things they sell. They’re a puzzle. You know, like, all different little electronics headphones, they’re really going to play a major role in stocking stuffers.

And again, it’s that line of practical versus a gift. Sure little kids are going to get toys, older kids, they’re going to get well I know you need a new headset. So you’ve previously been using the $10 one, here’s the beats one we just bought you. So I think it’s very likely that Five Below has a good holiday season, but they don’t have much in the way of a web presence. So there are some questions.

I think TJ Maxx and Marshalls is another one that I would assume is going to do well because people still like the discount, but it’s going to come down to our visitors spending more money per visit because they definitely have less visits.

Simon Erickson  14:40

Well, it definitely seems like something we should be keeping an eye on for those bricks-and-mortar retailers is what’s the average ticket size that people are taking fewer trips, but spending more money could be a net positive, for sure. But then let’s go back to the online sales. You know, the shipping across the country, the Black Friday deals, the Cyber Monday deals, the online shopping everything we just talked about. What’s this going to mean for FedEx and UPS.

Dan Kline  15:00

So they’re dropping the ball. And I think this is a big problem. It became public yesterday. And I’ll credit CNBC for reporting the story that UPS has been giving quotas to many of its top customers. So they’re basically going to Macy’s and saying, okay, we can only pick up this many packages today. That would be like at 7investing, if we said, well, we can only take 100 new members a day, during a time where thousands wanted to join. You guys were telling the story on Slack of when we launched and we had some website problems, and basically, how everyone on the team stayed up all night to fix those problems.

If you’re an executive at UPS, and you’ve taken a day off, or a nap or a lunch break in the last two weeks, you fail, and clearly they are it the answer for UPS cannot be, you know, capacity limits, it has to be, how do we get new capacity? And well, every airline in the world is flying under capacity now. So if I’m the CEO of UPS, and I think after the show, I might be the CEO of UPS. Hey, Southwest, can we use some of your empty airplanes? Can you sit some packages there? Can you put a net up and rope off the second half of your plane or the cargo hold? Or whatever it is?

There are answers to these problem.  And the answer isn’t turning away business like, again, we’ll go back to my retail experience. So as the holiday season went on, we got busier and busier. So what did we do as a store? We added cash registers so we could get people out. Now it would just be Square terminals back then we physically we had like the old school ding ding ding big cash registers in addition to our electronic ones, which meant someone had to work overnight entering those orders into the system for inventory purposes.

We started opening at six in the morning, we started staying open till 10 o’clock at night. UPS isn’t doing that FedEx hasn’t been dropping the ball as much. But I’ll speak anecdotally here. I ordered a coffee maker, we talked about that earlier through Shopify, FedEx is delivering it, it for a long time said it’s gonna get delivered Monday, on Monday came it wasn’t delivered, I went into check it. And FedEx said, Well, we’ve been sent the item by by the company that you bought it from, and there was no other information.

So I contacted the company. And they said, Yeah, FedEx has just not been updating its information. So basically, what does this mean long term for FedEx and UPS? It means that Walmart is likely to do what Amazon has done and build out its own infrastructure, It’s likely that Target is going to put more money into shipped, and other companies are going to invest more heavily in partnering with Instacart. And other places that can do delivery.

This could be good for, say, an Uber, which is looking at and I’m not a fan of investing in Uber, it could be good for Uber and DoorDash and other companies that are looking to take on some of that burden. Again, this is going to benefit the people are already doing well Target can say to you, okay, UPS can’t ship you that item from our central warehouse, we can ship it to the Target store near you, and then use Shipt to deliver it to you.

There’s going to be some hiccups, I think you’re gonna see some pretty significant added expense in getting stuff to you from the big players, because they’re gonna have to do things like that. And that is going to tell them if UPS and FedEx can’t pick this up. That’s going to tell them that that that that can’t be as big a part of your supply chain, as it is for everyone that isn’t Amazon. It’s a disaster, as far as I can tell.

Simon Erickson  18:18

That is interesting. So this is kind of the best case scenario for FedEx and UPS. It sounds like they’re dropping the ball when they’re not able to make those volume deliveries happen that retailers are needing, is this evolving retailers and their relationships with those infrastructure companies? Are they wanting to build their own infrastructure? Is it turning into logistics providers online? Like like Shopify? How do you see this playing out then?

Dan Kline  18:40

So it’s going to be really good for Shopify, it’s going to be, that’s a weird one to say it’s gonna be really good for Stamps.com for people that have built out warehousing and alternative infrastructure, because let’s pretend that you and I open up a chain of electronic stores, we have 200 stores in 15 states. Well, our ability to match Amazon to match UOS during a slow, you know, a non-overwork time, we’re not gonna be able to build up that infrastructure. If I can go to Shopify, if I can go to some of the other players that are evolving this, I think some of the airlines will probably backdoor this as well, at some point.

There’s gonna be opportunity. So you look at something where two years ago mobile order and pay was something pretty much only Starbucks could do, and a few people copied them that had real money like Dunkin Donuts and McDonald’s. Now, that is something that if you and I opened a coffee shop, we’re opening a lot of businesses, if you and I open a coffee shop, that’s like a $30 app we could get, and we could give our customers it’s not as good an experience as Starbuck.

But it’s like 98% of the experience of Starbucks, you’re gonna see that with fulfillment where there’s just services I can sign on for, well, I don’t necessarily know who’s delivering my package, how it’s getting delivered, or I’m just contracting that out. they’re picking up every day and it’s getting there in two days. That’s why Amazon went to one day.

But if you’re Walmart, if you’re best buy if you’re, you know, Lowe’s, you can’t necessarily say, okay, FedEx, UPS, USPS, they can’t be your provider. So you’re going to see opportunity. We’ve talked a lot about XPO Logistics a company, I absolutely detest. If they could get their act together and be really good at delivering, say furniture and appliances, there’s huge opportunity there. But there’s going to be third place marketplaces for all the smaller players and look to day delivery is the expected norm. Now there are some places you’ll make an exception if you buy a couch, you’re not that concerned if it gets there and in two days, but for the most part, that’s going to be be the big winner, and more companies are gonna have to spend more money.

I would be shocked if Walmart doesn’t start building out Amazon-like capacity to do delivery, because they certainly have the warehousing Look, your average physical Walmart store is gigantic. And you can already order it online to pick up in store where they’re using their their stores as kind of warehouses. They have the systems in place to say, okay, Simon wants that. I don’t know Ninja Foodie. Let’s take it off the shelf and put it in a place for Simon. That’s going to become more and more common and you’re going to see white labels. And look you even see I mentioned Starbucks before Starbucks has created a whole arm to license out their technology.

I will also point out when you’re talking surprise winners, the amount of money that’s going to be placed on Starbucks gift cards this year is going to be astounding, because nothing is a better lazy I sort of like you here’s a mildly thoughtful gift than a Starbucks gift card. And in this day and age where like you’re probably not going to go to the mall to be super thoughtful for like your housekeeper’s friend like her like whatever like third-tier gift you’re giving. Starbucks is going to be a big winner Chipotle a probably as well.

Simon Erickson  21:45

Personally, I am a huge fan of receiving those Starbucks gift cards. Maybe it’s because I drink a whole lot of coffee. That’s a very thoughtful gift for me for anyone that gives me free caffeine for life in the future.

Dan Kline  21:55

So I’m a fan. But there’s also a part of me that says like, ooh, like, Is that all you know about me? Like, this is a very shallow gift in terms of like.

Simon Erickson  22:05

Fair enough? Yeah, we’ve gone through a lot of the trends, we see the evolving kind of shape of retail that’s going on out there. You saw you talked about some obvious winners, we talked about some under the radar winners, but okay, Dan, so you get you get a Christmas wish list, Christmas wish list to retailers, you can put on your Christmas wish list this year that you’re really, really interested in? What are the two companies that stand out to you? Yeah,

Dan Kline  22:26

It uh, you know, I, you have to own Amazon. And the reason I don’t own Amazon as an individual stock is because of how much exposure to Amazon I have in my 401(K). Like, you almost can’t avoid it. So let’s throw them out. You probably own Amazon anyway. I love what Target is doing. You know, of all of these brands. Are you proud to shop at Amazon?

I don’t think so. There’s no lifestyle cache and stop shopping at Amazon. There’s actually lifestyle cache Target has gone back to and I hate when people say this, but Target has gone back to being “tarjay”. You know, with having the Magnolia partnership with with bringing in Ulta Beauty, and then backing all that with infrastructure that’s not quite up to Amazon levels. But Shipt kind of fills in those holes curbside pickup kind of fills in those holes, if you’ve gone to a fully revamped Target. And we’ve talked about this before, the ones with the Disney stores, they’re going to get Ulta Beauty stores, the liquor store that has local craft beer that really feels like you’re in a boutique liquor store, but you’re paying the same prices that you pay to Walmart liquor. So I think Target’s a giant winner.

And then I’m torn between Best Buy and Costco. Because it doesn’t matter what you spend at Costco as long as you stay a member. And nobody in a pandemic is getting rid of their Costco membership. Because you know, being able to buy like a pallet of rice and bulk paper towels is is more valuable now than it’s ever been. So let me let me say again, Costco, it’s kind of an always default. So let’s look at Best Buy.

What has Best Buy done over the last decade, they’ve gone from being the cusp of bankrupt to being a totally viable new company. And now they’re making a push into healthcare. This holiday season is going to help them with customer acquisition. There were some people that went to Amazon to buy something. And Amazon was two weeks out due to supply that’s not even Amazon’s fault. demand has been so high that’s helped Best Buy capture customer information. Once you have customer information that’s going to lead to a long term sales increase. So I would buy target and I would buy Best Buy. Simon, how about you?

Simon Erickson  24:30

I’m deferring to you. You’re the retail expert. And I’m gonna go with what you said Best Buy and Tarjay the two companies that Dan’s picked on his Christmas wish list in retail this year. Dan, thanks very much for being a part of this 7investing Podcast.

Dan Kline  24:41

I am always happy to get to talk retail is not a subject people want to talk about all that often.

Simon Erickson  24:46

And thank you everyone for tuning into this episode of our 7investing podcast. We are here to empower you to invest in your future. We are 7investing

 

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