How to Pick Winners This Holiday Shopping Season
October 11, 2021
It’s beginning to look a like Christmas.
That shouldn’t be the case in October, but current conditions caused by the pandemic have added to a trend that has been happening for a few years. The holiday shopping season has been spreading out beyond its traditional Black Friday start. First, we had stores opening on Thanksgiving then we had some jumping the gun and offering deals early in November. Now, while most retailers won’t open on the actual Thanksgiving holiday, many have kicked off their holiday deals already, well before we even hit Halloween.
In 2021, because of the pandemic, this actually makes some sense. Stores are dealing with challenging supply chain logistics and they also want to spread the holiday crowds out. Items are going to be out of stock which means consumers may start trying to find what they need sooner. This creates some unique challenges for retailers and it makes it very clear that there will be winners and losers.
The seeds for which companies will win have already been planted. You can’t fix your supply chain or find alternative sources on a widespread level quickly. That means that the companies which have been making significant investments for a long time are the ones best set to deal with this year’s unique set of problems.
Dan Kline covers the retail industry and he took a look at what to expect — and how to invest — for the 2021 holiday shopping season — on the Oct. 8 edition of “7investing Now.”
A full transcript follows the video.
We are going to talk how to invest in the holiday shopping season. JT, it’s early October, that would normally mean it’s not quite Halloween, but we’ve seen what’s called holiday creep over the past few years. And this year, it is unbelievable. October is the kickoff of the holiday season. We have seen Amazon (NASDAQ: AMZN), (Walmart NYSE: WMT), other major retailers start making holiday moves. There are reasons in past years I don’t like that. There are actually reasons this year why it has to happen.
And we’re going to get into that. Again, this is going to be a quick show. Just a little appetizer to kick off your weekend and give you something to listen to while you’re driving to wherever you might be driving.
But before we talk about 2021 which, as someone who celebrated 2000, the Y2K New Year’s not that long ago. Just saying 2021 sounds like I’m talking about some magic place in the future.
JT Street 2:00: It is Dan! Here’s our magic future, isn’t it great?
Dan Kline 2:04: So let me ask you, last year 2020, we were in the middle of the pandemic, things seemed bad. Holiday sales. Where do you think they netted out in 2020? Were they up? Were they down? Was a big one direction or the other?
JT Street 2:20: I would say, I don’t have. Hmm. I know that online I’m sure did great. But I would have to think that overall it was up because the people that had money had more disposable money because of the stimulus.
Dan Kline 2:35 Yeah, absolutely. Sales were up 8.3% over 2019. Historically, that is about double the average. The average is 3.5%. In 2019 it was 4%. We have a little bit of chart on that from our friends at the National Retail Federation. If you want to pull this up. It just shows that holiday sales have steadily grown, but last year was a big jump. Why is that? Well, we’d all been stuck inside. We all were a little bit miserable. And we were spending money.
But you mentioned, and thank you Ravi Shah, we appreciate you watching and welcome back. We know everyone can’t watch live. So we’re always happy when you do it. But what happened last year is you mentioned online sales were good and they were. But at the absolute peak, they were 20% of the total. When we got to December, no matter what was out there in terms of the pandemic, people just went like, Well, I haven’t gotten my husband a Christmas gift yet I’m going to put a mask on grab some sanitizer and go to the mall. Mall traffic at A-level malls actually returned to historic peak levels in December last year. So it really isn’t what we thought it was.
But let’s look at what this means for investors. And I believe we have a graphic for that as well. Did a lot of graphics for this show. So if sales are only flat this year, they’re still up on a two year basis more than the historical average. So 8.3% divided by two is going to be more than 3.5%. But if sales are flat on a company by company basis, you’re gonna see the media paint the season as a failure. What you really need to look at is the two-year comp sales stat. Last year might be an anomaly. We might have seen a lot of people do things like buy laptops like buy desks. This is basically what happened with every retailer. They had a really good last year. Some of them did not have a comparatively good this year. Even though the numbers were still good.
We will get to your questions as we can later in the show.
So what are you looking for as an investor? I think this is absolutely important. Now retail I know isn’t the sexiest area to invest but it is also a safer area than most to invest. So what do you look for? Omni-channel matters. What does that mean? Customers want to look at it in the store, order it for home delivery, look at it at home, buy it at the store, buy it on their phone, pick it up at the curb, buy it online, return it in the store. Whatever it might be. And that’s not something you can invest in quickly, that is something you have to do over time.
So you want to look at the retailers that have really really made those investments because you can’t turn on a dime. We saw this with like the Toys R Us collapse. By the time you know what you’ve done wrong it is almost certainly too late to fix it. That might not be true with say Macy’s (NYSE: M) and Kohl’s (NYSE: KSS) which have relatively good balance sheets but it’s probably true with Macy’s and Kohl’s.
Size matters. The bigger companies essentially have first dibs on merchandise. So you are going to hear things like “supply chain” and those are words, the supply chain is a problem. You know who’s not going to be honest stuff, Amazon, Walmart. Now will you be able to get everything you want? No we’ve had supply chain issues throughout the year where you might go to the store and there is a 2-pack of Brawny paper towels and a 12-pack of Bounty paper towels. You have to decide, do I want the off brand, do I want more paper towels that I need?
That’s probably going to happen when it comes to electronics. I had to buy my son a laptop during the worst of the pandemic and I pulled up a list from our friends at CNET, I have some friends who work at CNET, of the best laptops under $500. And I just kept clicking on the Amazon links until there was one that was in stock. And like three of them were out of 10. That’s what that this holiday is going to look like for big retailers. For the most successful retailers. It is not going to look good for the less successful retailers.
You are going to see, and I’ve talked about this, back when I ran a toy store. I ran a very successful multi-million dollar toy store. I had to place my Christmas orders in the summer or in some cases a full year in advance when you’re talking Lego or puzzles or other things that are not made in the US. Well, if a big company, back then Toys-R-Us, was sold out of Legos you know whose order they took, mine. You know and that is a problem, that can happen. That is going to happen. So this is going to be a winners, win.
What else should you be looking for this holiday season? It’s very likely that practical gifts may rule the day. You might see people getting winter coats and laptops and things for the house. Air fryers, whatever it might be. Toys are going to be harder to find than usual but that won’t hurt overall sales. Why do I say that? Because you’re going to get your kids gifts. And if you can’t get them exactly what they want very few parents are gonna go, and like you know what? The Cabbage Patch Kids, boy am I dating myself there, are out of stock can you wait until February to get? They’re going to get a gift and then they’re going to get the Cabbage Patch Kid in February. Boy do I wish I could think of something more modern than that.
Stocking stuffer and treasure hunt stores will do you well. That’s your Marshalls, your TJ Maxx, your Five Below’s (NASDAQ: FIVE), to a point your Dollar General’s (NYSE: DG). Established gift card stores, think Starbucks (NASDAQ: SBUX), everyone is comfortable getting and using a Starbucks gift card. They don’t necessarily want a Designer Shoe Warehouse (NYSE: DBI) gift card. But you know that there are certain places, and Starbucks is a great example, that it’s really easy to use a gift card. They’re going to have hundreds of millions of dollars in gift cards.
Travel and experience gifts will also be big. We are seeing a resurgence here in Florida of people booking travel. JT, have you booked any trips? Are you even thinking about going anywhere? Or are you just hunkered in tight in Texas?
JT Street 8:21: I’m definitely thinking about going places. But we have a three year old who’s not able to be vaccinated yet, so we’re still hunkered down until she can get safe and then gosh, we’ve got to go somewhere, because there’s so much build up.
Dan Kline 8:36: Our very own Matt Cochrane is staying at my vacation place this weekend. He is at Disney World as we speak. I’m glad I could be a part of making that happen.
How do you invest in retail? This is an important one, because you don’t you don’t just go by the high fliers. There are some tricks to this. And we have a graphic for this as well. So you want to look for companies with strong customer bases. Places that people go where they’re not necessarily going for a specific reason. If you are a Best Buy (NYSE: BBY) customer you might go there just to walk around. This holiday season is probably not going to give lesser players much of a chance to steal business. Because we don’t have these concentrated days, where oh my god there’s a giant line at Dick’s Sporting Goods (NYSE: DKS). You know what, I’ll just go next door to this lesser store and see what they have. That’s just not gonna happen as much. And how consumers feel about a brand it’s gonna matter when items aren’t available exactly when customers want them.
You are going to trust if you have a relationship with, I don’t know, I’ll use Dick’s Sporting Goods again. If you know that when they tell you it’s coming in two weeks, it’s coming in two weeks, there is a better chance for that. And technology is going to matter. Apps. Ability to communicate with customers. Ability for say a Nike (NYSE: NKE) which has put a lot of money into direct to consumer to say hey this is out of stock but we can get it to you in a month. Or here’s when you have to come online to try to get another shot at that. The companies that have not done that, that do not have you in their digital ecosystem, they are not going to be able to do that.
What about shipping companies? Everyone asked me this, like, oh, should I invest in auxilary plays? Well, if you had to, everyone knows I’m pretty bullish on Shopify (NYSE: SHOP), which does do some shipping, but it’s basically an all in one auxilary play. I would argue that they’re one of the four big retailers in the US. But when you look at FedEx (NYSE: FDX), when you look at UPS (NYSE: UPS), there is an awful lot of cost associated with it, and you can’t scale quickly.
So when I ran the toy store, my boss was an executive for a gun manufacturing company, I won’t say which one, just in case, the guy who owned the toy store and he’s a manufacturing whiz. And they had to make a decision whether to build a new factory because order capacity was so hot. And if you do that in order capacity drops, you haven’t paid back your factory. That is a make or break decision for a company. Well that’s what FedEx and UPS deal with all the time. Do we add capacity? Do we just hire temporary workers? Do we spend money on robots? And in my opinion, those make those a lot like one of my favorite companies, T-Mobile (NASDAQ: TMUS), which I’m not an investor in, because the second T-Mobile finishes 5G, they have to start investing in 6G. I just look at those companies as kind of a sinkhole and they’re very, very vulnerable to the Amazons and Walmarts of the world. And even, not that these companies will make money, but the DoorDash’s (NYSE: DASH) and the Uber Eats (NYSE: UBER).
So let’s sum this up a little bit. If you’re going to invest in retail you want to look at companies that have loyal customer bases. Look at say a Costco (NASDAQ: COST) where people are just happy to be there and really excited. And their membership numbers never vary more than like one tenth of a percent month-to-month and there’s a lot of customer satisfaction.
So you want to look at things like the American Customer Satisfaction Index. Now, that’s not 100% true because Walmart tends to rate badly but within the Walmart customer, they they would rate highly. But a broad survey doesn’t necessarily capture that. So there’s a lot of money to be made in this. This is going to be a strange holiday space.
Let me give you a couple of shopping tips. Not from a stock point of view but for a holiday point of view. If you see something you want to buy that’s on your list JT. If your three year old wants, a certain doll, or I don’t want to stereotype, a certain Nerf gun, whatever it might be.
JT Street 12:31: The dollhouse is hidden in the room as we speak. Yeah, she’s not gonna watch this show we’re good.
Dan Kline 12:36: Yeah, buy it now. Yeah, our three year old demographic is terrible. We do not test well with them.
JT Street 12:42: We kill with the under-fives Dan, what are you talking about?
Dan Kline 12:45: Hey, look, I have some Teletubby-esque qualities so that is certainly part of it. But if you see something you want, buy it, especially when it comes to electronics. The days of “let’s wait for the Black Friday deal”, where maybe the 65 inch TV’s gonna be like $260, which is what my neighbors paid last year. I paid a little more waiting a little bit longer. Those deals are not likely to happen.
So know what a base price is. And if you see it at a price that you’re comfortable with, buy it. And if it’s a big ticket item, I’ve talked about that I’ve ordered a piece of exercise equipment. Well, that piece of exercise equipment, they’re not even going to tell me for one to three weeks when it might be coming. So if that was a holiday gift, it would probably be pretty good that I got ahead of the game. This is going to be an issue where supply chain, stuff not being in stock, is going to be a problem.
But at the biggest retailers what is that going to look like? That’s gonna look like your meat counter looked during the worst of the pandemic. Where you go in going, you know what I want, I want short rib on the bone. And well there is no short rib on the bone, but there’s flank steak, and their strip steak and there’s tri-tip and there’s three other things you can substitute. It is going to be a lot like that.
Let’s close out with the comment from Ravi Shah. We appreciate at least one person watching today. “Do you think we’ll see crazy amounts of people tripping over each other on Black Friday this year”? I think the news might portray it that way. I think those visuals, but no I think we’ve moved pretty far away from. Most places are closed on Thanksgiving, which the retailer in me says, “no open”, like do all the sales you can. But the human in me says that’s probably for the best. I’m not so sure it matters if you work in the afternoon on Thanksgiving or have to get up at four in the morning on Friday. Those are both kind of just the reality of working in retail.
But I don’t think we are geared towards the traditional Thursday, Friday, Monday. Cyber Monday will be a big deal. There’ll be deals then, but I actually think your deals are already happening. And those deals are going to be extended for a long time. So no, I have no plans to shop on Black Friday as a reporter I used to make sure I went around to all the stores on Black Friday. And just sort of get a gauge of it and I would do the same on Thanksgiving. Not as much my job anymore, so probably not something I will do.
And here in Florida everything is a little bit different as well. We don’t have the Thanksgiving closures you have in other places, because we have so many tourists that restaurants can’t really close. I mean obviously retail stores do close on Christmas and Easter and things like that. But also, Christmas never feels right here. It always feels like you’re at like a Brady Bunch Christmas episode where they’re in Hawaii. It’s always, our big Christmas tree here in West Palm Beach is a sand castle.