Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
7investing's very own Dan Kline chats with Simon Erickson about changes taking place in the retail industry.
April 13, 2021 – By Simon Erickson
Retail isn’t dying. It’s just evolving.
Companies with an established physical presence are leveraging the internet to reach customers. And while new digital trends like direct-to-consumer are certainly taking shape, retail concepts like brand loyalty and customer focus are still just as important as ever.
7investing lead advisor Dan Kline is an expert on the retail industry and has hand-selected several recommendations from this industry. In this exclusive interview, Dan chats with 7investing CEO Simon Erickson about the most important changes underway in retail. The two discuss e-commerce, the new face of malls, stores-within-stores, and a few trends worth watching closer. Dan also describes why brand matters more now than ever and a few retail companies which are on his shopping list as an investor.
Publicly-traded companies mentioned in this interview include Adidas, Dick’s Sporting Goods, Dollar General, Nike, Nordstrom, Target, The TJX Companies, Ulta Beauty, and Under Armour. 7investing’s advisors or its guests may have positions in the companies mentioned.[su_button url="/subscribe/" style="flat" background="#84c136" color="#ffffff" size="6" center="yes" radius="0" icon="" icon_color="#ffffff" desc="Get full access to our 7 best ideas in the stock market for only $49 a month."]Sign Up Today! [/su_button]
Simon Erickson 0:00
Hello everyone and welcome to today’s edition of our 7investing podcast. I’m 7investing founder and CEO Simon Erickson and today I’m excited to talk about retail. Because we see a lot of headlines about retail is dying and bricks and mortar stores are dying as e commerce grabs a larger and larger market share of the overall pie. But is that really the case that retail is dying and bricks and mortar is slowly demising?
We don’t know if that’s for sure the case or if retail is just evolving. And that’s why I’m so excited today to talk with my special guest, our very own 7investing lead advisor Daniel Kline about the changing face of retail. Dan, welcome to the podcast here today.
Dan Kline 0:42
Thank you for having me. This is an issue I’m super duper passionate about. Because it’s amazingly lazy reporting. As a journalist by background, my job is to get things right. And here they only look at one data point. They’ll say well 8000 stores closed last year. That is absolutely true. Is that a sign, retail is dying, or that companies like Sears, JC Penney, GNC, Children’s Place. These were terribly run companies like yes, Belk died, HH Gregg died. You know what’s doing great? Best Buy. So this entire retail narrative, it just isn’t correct. And I really want to correct it. So thank you for having me on the show.
Simon Erickson 1:21
Well, let’s settle the score on this one day. And I’m really excited to hear your perspective because I consider you to be the retail guru, even within our own team, but then also just anyone who follows this market. Let’s talk about that narrative a little bit.
Dan Kline 1:34
So I’m talking to the temple, I’ve demanded a temple as a guru. And you’ve said no, but we’ll get there working on it. So here’s the issue they throw around the term retail apocalypse. And when you look at the 10,000 point view, but you know, view that seems right, like stores are closing, it feels like all this business is going to the internet.
But here’s the reality. In 2019, before the pandemic, about 13.5% in 2019 of all retail was done online. Now, that’s a significant number. But we did a poll on this on the 7investing Twitter, and the vast majority of people assumed it was over 50%. So the way this has been presented is incorrect. During the absolute height of the pandemic, we’re all locked in our houses where we’re ordering like crazy. You know what the number went to Simon, it went to 20%. That suggests that 20% is the like five years from now number.
Now it’s gonna get squishy, it is not going to be an easy to determine number. Is it a digital sale, if I look at it online, and then go buy it at my local Target? What if I go look at it at Target and then ordered online? What if I buy it online and pick it up in store, these numbers are going to get a little squishy, but really good retailers need brick and mortar. Even Amazon, which is a quote pure digital company. There’s an Amazon four star store at the mall down the street from me or like 20 minutes down the road from me. There’s Amazon bookstores, there’s the Amazon Go convenience stores, there’s Whole Foods, which has things like Kindles on display.
Brick and mortar plays a role in this and it’s not always the role you think. Like sure I live four tenths of a mile from Target. I could walk there right now I’m pointing this way, because it’s that way. I could walk to Target right now and get something. I could also order something on Target for delivery in a couple hours. I could order from Instacart and get food from wherever I want. Like there’s so many methods to do this, that it’s much complicated than that. That Target store isn’t just a physical store. It’s also a distribution hub. And that’s true of Whole Foods. That’s true of Best Buy. That’s true. All the best retail. So call it a retail evolution. Don’t call it a retail apocalypse.
Toys R Us didn’t go out of business because of Amazon. Toys R Us went out of business because it was incompetent. And I think that’s generally the thread Now, are there some good retailers that just didn’t quite figure it out and they did their best? Yeah, I’m sure there is some collateral damage to that 13.5% or whatever it is, or 20% that it evolves to. But that’s not why Sears closed so that means there are still some Sears but that’s not why Sears has gone from 2000 stores to 400 stores. That’s not why Dillards and JC Penney’s and to an extent Macy’s are struggling. Their struggles are bad management. Their struggles are not seeing what customers wanted. And not evolving.
Toys R Us barely had a web presence. I ran a toy store for it for fun to go to. You know what wasn’t fun to go to anymore? Toys R Us because Target has all the toys. You probably have to go to Target as a parent anyway. So if Toys R Us had been running gaming tournaments and learn how to play and you know, design a dress for your doll, or whatever it is, they probably still exist. I would argue if I had been made the CEO of Toys R Us they’d be just fine. But that was never close to happening, of course.
Simon Erickson 4:48
So smart retailers are not being displaced in the traffic that they’re losing from in person visits. They’re just evolving and moving online and the ones that do it right are actually benefiting from this trend.
Dan Kline 4:59
The TJ Maxx, Marshals of the world, there’s a whole family of let’s call them treasure hunt stores, you know, Five Below or Ollie’s would sort of fall into that. They’re all like value, treasure hunt areas. That type of store is going to be fine and doesn’t need a digital presence because it’s entertainment, you want to go to Marshals and find that like $40, you know, $100 shirt. That’s fun, there’s a reason to do that. So those stores are the exception.
But if you’re a Target, if you’re a Walmart, if you’re you know, any store, you need to serve the audience, wherever that audience might be. So there are times where even with Target being closeby and I’m back to back taping, like eight things. So if I needed something for dinner, I get it via delivery. Retailers that embrace that, that said, Here are all the great things and oh, if you want to come to our store, here’s the like 12 fun reasons you might come to our store or, you know, hey, it’s a clothing store. If you come in once we’ll measure you and then you can buy a suit and know your measurements for the next you know, six months or a year and you know, till you get fatter or thinner or taller or whatever might happen to you.
There needs to be value add to a store. So if you look at a target, adding Ulta beauty, adding Disney stores, adding really great liquor stores. Revamping their stores proactively, so when I walk in the stuff right near the door is the stuff I might need. So if you go to the target near my Disney house, when you walk in, you know what’s there? Sunblock, goggles, snacks, really cheap towels with you know, Florida on it. Mickey Mouse collected collectibles, but like toys, that’s the stuff people who walk in that store might need the most. The one here in West Palm, which is being redone, well my needs have a Target 99% of people me would drive to most of the time, those are going to be different needs. So they’re doing each store on a custom basis and really thinking about it. That’s very proactive, as opposed to many retailers you know, I’ll give Macy’s an example. Let’s take our stores that are just breaking even and close them. Well you know, you could do that but you’re always going to be changing geography and a need to close stores. We’ve talked about this with Starbucks. Like work patterns might change maybe an office building closes so target closes a locate Starbucks closes a location that’s a different type of proactive than not trying to manage your mediocre stores and make them good stores.
Simon Erickson 7:22
Yeah, the store within a store concept is an interesting one like you mentioned Ulta beauty within the within the Targets. I guess it kind of brings me to the next question which is I have yet to see that you can kind of replicate me the shopping mall experience online, right? If you’re going to Macy’s or Target some you’re going to that destination because it’s an individual website. It’s like when you go to Simon Property Group and those all of a sudden, you know, 23 different stores to shop from in the same place. How are malls reacting to this trend of online sales or our malls doing okay, are there are they are they actually hurting from this?
Dan Kline 7:58
So let me jump in with with a sort of a preamble to that. It’s not all that fun to shop online. It’s fun to get the item. It’s convenient, with the exception of maybe like Woot, which is owned by Amazon, which is a daily deal site where you log in every day and you go, oh, wow, it’s 80% off a phone charger or there’s Beats headphones for $30. Like that’s a little bit of fun experience. But if you go to the mall, you can get a pretzel or a Cinnabon or a bubble tea or whatever it might be and you can walk in stores where you’re never gonna buy anything and there is a fun experience and going to the mall.
There is another false narrative about mall traffic. There’s this idea that mall traffic cratered. Now it cratered during much of the pandemic because we weren’t going into crowded spaces and some malls were closed or offering the operating with very limited you know only certain people in the store even even my Simon mall now you know is operating with limited and I think there’s a mall owned by one I forget who else but a different mall operators that the individual stores are limiting capacity. So you get to GameStop and they might only be able to have seven people in the store. And I bring up GameStop not because if it is a stock but GameStop is a fun store to look at video games and I’ve never purchased anything there for the most part. But I’m not waiting in line to get into a GameStop.
But in 2019 A list malls so I’m not talking like the sad mall that’s mostly like cell phone stores and places that sell hats. And like the food court has like three openings and two local restaurants like and like and like a concept no one would want like every day is Thanksgiving like like that. That mall is suffering. The good malls had peak traffic in 2019. The good malls came close to those numbers during the last two weeks of the holiday season. So people like going to malls.
What a mall is is going to evolve. Are you going to see more events in malls beyond meeting the Easter Bunny? Yeah, I think you’re gonna see performances and interactive spaces. The mall here at Wellington Green now has a like a shooting gallery kind of place and a place you can make slime and you know that I think you’re going to see more of that you might see more coworking in malls, you might see more hotels in malls, you’re definitely going to see gyms and grocery stores replacing, you know, end cap department stores because we are seeing less of those.
But Simon, you’re were a teenager once you’re an adult now. It’s still fun to walk around the mall, and just like see what’s there and be like, oh, maybe I do need that like or whatever, you know, you know, whatever it might be, or you talk yourself into some sunglasses, you don’t really need and you know, and then you feel bad about it so you eat the whole Cinnabon. The food courts are fun, like there’s a lot of things about malls we like, and good malls are going to continue to thrive.
So if you’re looking at it from an investment angle, Simon Property Group is a great investment. Now might not be a great investment for the next two years. Yeah, the next few years are going to be very capital intensive. Their mall in Boca, for example, they’re building residential. But once that high end apartment residential is open, you know, what is gonna do well? The nice restaurants at that mall, they’re gonna have, you know, 800 people or whatever it is, with money that live, you know, where essentially, they’re the hotel restaurant for that, you know, apartment complex. Good companies are getting really smart about it. And I don’t think kids are going to want to stop going to malls. I will say in communities with lesser malls.
Target has somewhat become the mall. You see a lot more teens walking around Target. This is very anecdotal. But I think as you have more store within a store concept, and it’s true Best Buy to an extent to, you know, maybe mom is going to Target and you know, the teenagers want to go to Ulta. Maybe the little kids want to go to Disney, maybe dad wants to go to the liquor store, like, you know, with Best Buy, sometimes I might be like, Oh, I just really want to physically look at some of the Apple products. And you know, there’s Apple Store within a store in most Best Buys. And some of them there’s whoever your local internet provider is, and it’s a lot easier than going to say a Comcast office, you know, to get service.
So you’re going to have to be really creative, like silly things that seem silly like there being a Starbucks in a Target, that’s a traffic draw, like I walk to Target most mornings and get a coffee that I can no longer drink at Target, because at the moment, you were not allowed to consume beverages in the Target. At a normal time, I’d probably walk around the store, and I might buy a grocery. I might buy something for dinner that night. That’s actually going to in normal times, that might keep me from the grocery store, because I picked up what I need while getting my coffee. Now there are plenty of grocery chains that have Starbucks, you know, embedded as well. So that’s not unique to Target. But retailers are going to have to be clever. And they’re going to have to prove it to consumers more because there are days where it’s like, Do I want the Target or I just get what I need on Amazon and it’ll be here tomorrow. So you’re gonna have to win my business. But a lot of retailers are doing a great job at winning my business.
Simon Erickson 12:42
I certainly see the appeal, it seems like a win win for Target to have people come in to get a Starbucks and while they’re there they go and shop and buy 50 other things and then also the win for the Ulta beauty and the Starbucks is of just placing something within an existing location that’s already at the traffic. Let me shift gears a little bit Dan and talk about direct to consumer because this is another trend that we’ve seen in recent years, right? We’ve seen I guess companies like Warby Parker for eyeglasses, you know, again, Dollar Shave Club you know everybody’s trying to bypass this bricks and mortar presence and then just know what they know about consumers on the internet and appeal to them directly. But then a lot of those companies have actually kind of retracted and and are now trying to get more of a physical presence as well. What is your take on the direct to consumer trend and how is this evolving right now?
Dan Kline 13:28
So it’s become a two way street. So I am Dollar Shave Club customer. I tried out a bunch of Warby Parker glasses and find the experience of doing it online very frustrating. They send you five you try them on my wife doesn’t like them. I send them back. So as they launched, you know they have some brick and mortar stores there. There was one in Alexandria, Virginia that I walked by a lot. There’s one in Miami. But they’re going into some Nordstroms. And why is that beneficial? Well, it gives them a physical presence. It allows me to find the style I like. I might order my next 10 pairs of glasses online, but having that physical touchstone especially for something that is so visibly part of you, you know and yes, they’ve done a good job with online and the same thing with Ulta beauty.
Once you know what you want to buy at Ulta beauty you might never have to go back into a store again. But you still and again they have a great website with testing as well. But you want someone to do your makeup and show you what’s right and see what that shade of lipstick looks like. I assume I don’t wear a lot of lipstick. But some of your top tier retail brands – Nike would be the prime example. Nike is actually pulled out of about 20 major retailers. Basically Nike has said if you do not offer a differentiated Nike experience, we don’t want Nike products just thrown on the shelf.
So there’s no Nike at DSW. There’s no Nike yet, you know Evelyn’s and and a lot of sort of second tier chains. And they’re basically saying we want a one on one relationship with the consumer and Nike is going to launch about 300 small format stores where if you want to go in and try on sneakers, you’ll probably be able to run on the treadmill and get your foot tested and all that stuff. You’ll be able to see the $75 golf shirt. So they’re going to continue with top tier retail and their own retail, but they want half their business to be direct to consumer, whether that be through their physical store, or through their website.
And you’re also seeing you know, that’s somewhat the Lululemon model. That’s a model Under Armour is trying to do. I don’t think it’s going to work for Under Armour, because I think they’ve devalued their brand. That’s something Adidas is doing, where they will have a retail presence because it is clothing, it’s stuff you want to try on. But they’re going to try like Nike has its sneakers app, and my son knows exactly when different shoes are going to quote drop or I would say be released, and how to get them and how to order them and they can create those events. But they do still want that event at you know finish line where people are lined up around the mall hoping to get the sneaker.
So your direct to consumer companies are going to go into brick and mortar stores, I love that I can buy $1 Shave Club handle because I lose mine all the time when traveling in Target. That makes it so much easier, I don’t have to add it to my next box and not have a razor for two months or buy three of them at a time. Because I know I’m going to lose it. The fact that I can just walk into a Target if I’m short supplies, that’s great, I pay a premium for that, frankly. I bought my Quip toothbrush and a Target and find it annoying that I can’t buy replacement parts for it there. You have to do that via subscription. I love the subscription. But what if I like when I moved I lost one of my replacement heads and I’m I just didn’t know where it is they’re this big. And like, it’d be nice if I could go to Target.
I think all of those brands, you know, in your Casper mattresses are opening up, you know, physical stores, you’re going to see a lot of them be store within a store. I think you’re going to see a big pullback on standalone locations, because it doesn’t make any sense. Like if it makes if I can be inside a JC Penney or a Dillards or a Macy’s or whatever up whatever chain store it is I almost named like three from the 80s. That would be bad, it was going to be more and you give me a reason to go in, that might be a way those brands can revitalize themselves. I mean, remember Best Buy was left for dead.
Remember the stories were Best Buy is just a showroom for Amazon, you go there? Well, they did a couple of major pivots. First they took their salespeople off commission. So if you ask someone what the best product was, it was the best product, not the one where they made the most commission. They eventually went to free delivery, meaning if I’m buying a 65 inch television, they’re not like $75 to deliver it, they’ll bring it to you just like Amazon will. And they brought in all those stores within a store. So you know, I might go because I need a cable. But my son might want to go look at the Microsoft section or whatever it is.
They also, and this is pretty subtle – You remember the days when you’d go to Best Buy and like an HDMI cable would be like 10 times the cost of it on Amazon banking that you’d need it? Well, most people can wait one day, so Best Buy, like they’re still not as cheap as Amazon. But they’re a reasonable markup. They’re like a convenience markup that that’s acceptable when I bought a printer, and they never tell you with a printer that it doesn’t come with a cable. So every time I end up having to go get a printer cable. Now you feel like it’s okay to go to Best Buy. So again, smart stores that have been incredibly proactive about how they change their business have done really, really well.
Stores like like JC Penney, that made some changes, but mostly tweaked their core concept that didn’t make any major changes. Another big winner Dick’s Sporting Goods today launch an experiential store would be a few days ago by the time this airs. And in that store, there’s fields like local teams can book time in the fields, there’s a running track. The golf area has golf simulator base. So you can actually like try out a club in like a realistic setting. Whatever works, they’re, they’re gonna fold into their, you know, to the full size Dick’s stores. And they might if it does, really well launch other versions of that they have two or three other concepts being tested.
Amazon has like 15 concepts being tested in some states. You constantly have to evolve and get better. And some of those concepts have to work. Macy’s tried Story, which was a sort of curated, ever changing store, and it didn’t really work. But what they should be doing is throwing eight more ideas at the wall and really seeing which ones resonate with consumers, you know, which ones work I mean, Nordstrom for some reason has a cafe but I go to it every time at the mall, because it has much better seating than the Starbucks does. Does it make me shop at Nordstrom? No, it doesn’t, their stuff is too expensive. But you have to try lots of different ideas, you have to be willing to fail in order to succeed.
Simon Erickson 19:31
There’s a lot of great context in that Dan, of what you just said, I want to double click on a couple of things. One of them was that you said that you were willing to pay a premium for certain items and go in person. And it sounds like Best Buy is a great case study of a retailer that has listened to its consumers and tried to figure out why is it that people want to go to this store? What is it that’s bringing people to Best Buy and then they pivoted the business a little bit to appeal to that. Do you believe as an investor to I mean, we’ve seen a lot of retailers also go bankrupt. Let’s say the other side of you know, things that have not worked out well. But do you believe that they’re that the merchandise being sold by retailers also has an important part to play in this where there are some that are more Amazon proof, whether that’s Tractor Supply, whether that’s, you know, cell phones that you have to be there to activate in person, whatever it might be? Does that play a role in, in the success or failure of certain retailers in the next couple of years?
Dan Kline 20:23
Yeah, absolutely. I mean, you’re, you’re not going to buy a $2,000 laptop you didn’t touch. You might, if it’s Apple, and you’re an apple person. And I certainly have because I ordered direct from them at Christmas, Apple usually does some sort of sale, which is their only sale of the year, normally. But in general, I go to Best Buy, because I want to put my hands on electronics and I think that is valuable. But that sort of added fee for convenience goes in both directions. So when I order from Instacart, which I do often I will get like maybe once a week, we like oh crud, it’s two o’clock, I don’t have anything to cook for dinner, we have meetings, I’m going to be here It happens like one Friday a month, usually. And I will place an Instacart order knowing that I’m paying a premium. I will often order liquor from Instacart, which I know the exact premium I’m paying because I know what the items I buy, it’s only a few different things cost. And you see it you’re like, wow, that is, you know, marked up 10,15,20%. But I don’t have time to go.
Simon Erickson 21:22
And for those long team calls we have!
Dan Kline 21:25
I need them for the recovery. Absolutely. You know, but but that being said, it goes in both directions. And there’s a breaking point for all of it. You know, if it seems it, you know, like it’s an excessive charge, then I’m not going to pay it. If I go to Best Buy. And I can see like whoa, hey, a Roku stick is $45. And I could get one for it on Amazon for 29. I’m probably waiting a day to get it unless I really really need it that night. So you really need to know your customer base, you really need to respond to it, you have to treat each store and each market individually.
We talked about that with target before the Target in the tourist area is putting different things up front. Well, a Best Buy in a city probably doesn’t need to stock as many 70 inch televisions. They you know, they probably need more moderately sized things and and stores need to do that there’s so much AI they can use. There’s so much inventory data they can use. Amazon knows what you’re going to buy before you buy it. They’ve talked about this a lot. If I’m going to buy like green tea and replacement razor blades like their AI has has that in a package like 12 hours before I’ve ordered it. Like literally to that level.
And maybe the other retailers don’t have that level of of information, but they should know what to be stocking. They shouldn’t be sending out the same selection of merchandise to a bunch of stores. I found it baffling for years that stores here in Florida would have the same selection of winter coats as certain chain stores when I lived in Connecticut. You know what I never need here? A winter coat. Now, it doesn’t mean you don’t have a small selection of winter coats because people travel. But you don’t need that enormous selection and that’s something that you could make an order online item.
So you really need like here, they’re at least smart enough they sell bathing suits all year. That is not something you generally see, you know, other places where that has seasons, we don’t have seasons, it’s always you know, okay to go swimming. You’re going to need to see more and more of that because logistics and moving items around. Like Nike another great example, they can see the inventory at every store. So if you Simon want to size, you know, 11 and a half specific signature sneaker and they don’t have it at your store, the store you’re in can go online and be like, okay, the closest one to where you are in Texas, is in North Carolina. That’s more efficient than shipping you the same pair that’s at the outlet across the street here at West Palm Beach.
That level of data of sort of shipping logistics, you have to do that, because it’s really expensive. Free shipping is an expectation now, so you can’t do free shipping, unless you’re really really good at shipping. And you saw a Target bought Shipt, which is helping them with with next day delivery. A lot of companies are making massive infrastructure investments. That’s going to make investing in some of these companies wonky. We’ve seen this with Amazon. Amazon had this amazing quarter, they made $5 billion. And they’ll come out and say we’re taking that $5 billion and we’re putting it into improved supply line logistics and we expect to spend all of it. People get mad and the stock goes down. That’s the type of investment that Sears and JC Penney didn’t make when they were profitable. So you want to salute those things.
You want to see the money well spent, but there is no finish line for retail. It’s going to ever evolve. And as I said earlier, we don’t know two years from now what a digital sale will look like. There’s going to be a physical and digital presence for an awful lot of sales. Even something like returns if I buy something purely online on Amazon, but then take it to a Whole Foods foods to return it, is that purely a digital sale? It really isn’t. So it’s all going to get very confusing but good retailers are going to have stores. Those stores might look different. They might have a bigger space devoted to, to warehousing and shipping and less space devoted to what customer you know, the actual store part of it. They might pull things off store shelves for online delivery.
I think it’s been proven we like going to stores we’re not heading to that future from the movie WallE – I hated that movie, people get so mad when I say that. But we were all sitting around an a couch and we’ve gotten to 600 pounds. No, we’re still gonna want to like want to go to the mall. We like going to grocery stores, it’s fun to go to the liquor store, to you know, to buy a six pack and see what the new selection is. That’s not going to change and I get it, there’s going to be evolution of digital shopping like, but Simon Are you really going to put on your headset to go to the virtual mall, like that sounds good as like a one off goofy experience that isn’t going to become the norm, if ever, certainly not for a very, very long time.
Simon Erickson 25:56
Let’s double click on brands to I mean, there’s so much of power brand and retail too, right? We talked about Starbucks versus just other coffee houses talk about Ulta beauty it used to be like, versus just other cosmetics that other stores might have. Even within the store within a store concept. The brand really matters, right? The brand is really important that you’re working with. First question is a two part question for you. First of all, what’s the importance of brands in this evolving retail world? And secondly, I wanted to double click on something else you said which was that Under Armour and Adidas were devaluing their brand right now what does that mean?
Dan Kline 26:27
So I’ll take that one first.
Simon Erickson 26:29
Dan Kline 26:30
I joke that I own a lot of Under Armour and Simon you know, I work out with a trainer three times a week, I’m making a real effort to be in shape. But I am not a paragon of physical fitness.
Simon Erickson 26:40
The 7investings are disappearing behind your muscles that are that are expanding over the last couple weeks.
Dan Kline 26:46
Under Armour is a premium performance brand. And I don’t pay a premium price for it. I buy it when it’s on sale. I buy it when it’s at the outlet store. I’m not a great advertisement for Under Armour. My trainer wears Under Armour like collared shirts like this. And he’s a billboard for it. He you know, he’s trim, everything looks good. So if you see him in the gym, you’re like, oh, Under Armour clearly works. If you see me in the gym, and I’m not saying they should want me to pay a premium for it. And if I pay a premium, it’s worth people seeing me in it. But the fact that I bought it for 30 cents on the dollar, and I’m not a great advertisement for them.
You know, look, Lululemon doesn’t discount. Nike is only discounting is at its outlet stores. And even at the Nike outlet stores. Their discounts are two t shirts for $30. And yes, there are sneakers on the clearance rack. Those aren’t the good sneakers, those are the sneakers that they were selling for $60 at Kohl’s and they no longer sell at Kohl’s that are now $45. That’s literally an outlet store. So you have to be really protective of price. Sometimes this is going to sound awful. It’s better to destroy or donate stuff then create an expectation of sales.
So I don’t wear a lot of yoga pants. But if a pair of Lululemon pants cost $85 – they might cost more than that – there’s going to be a certain group of women for whom it’s a status symbol. Now brand works in two directions. So Target has a ton of owned and operated brands, meaning companies they created where they don’t have to worry about Nike pulling it from them because they own. If I go to Target and I buy their yoga pants, I know they’re not Lululemon. But if I’ve liked the quality and the price is a third it isn’t devaluing Lululemon but me as a consumer, I own a lot of Target exercise clothes. I own a lot of Target bathing suits, because they wear well, they’re very, you know, value priced compared to other places and I trust the parent company.
I don’t care what label. But the Nike label mean something the Lululemon label means something. Even on Amazon, you know, their house brand labels can mean something. One of the challenges Amazon has had is when they build, you know, an apparel brand, they have a ton of them, you know, they have like six different underwear lines. They don’t sell you know why they don’t sell? Nobody wants to buy underwear, they haven’t seen it. You know, you don’t want to buy an athletic shirt you haven’t seen. So you’re getting this in two directions, these premium brands that are saying hey, you’re going to pay extra money for Nike because it’s Nike. That means a certain quality. You know, that means a certain cachet and wearing it. Or you’re going to go to Target and saying well I have no idea what Good and Gather is which is one of their food brands. But I pretty much trust that target is going to have a decent quality breakfast cereal or pasta or or you know, garlic powder or olive oil or whatever it might be. So brand matters, but it works on a lot of different directions.
Simon Erickson 29:42
Great points. Dan. Let me bring this back to the investing perspective on it too. Because I guess my first question for this part would be do companies care if they sell something at a bricks and mortar location or if they sell it directly? A lot of retailers don’t report this specifically right the margin breakout of directions DDC versus versus in store? Do you, as an investor have a preference when you see companies selling more on their online or digital channels? Or does it not matter to you,
Dan Kline 30:09
I’d rather see a company have a direct relationship with the consumer. If I walk into a Finish Line and buy Nike sneakers, Nike does not have my email address. They don’t know what size I am, they don’t have the ability to to say, hey, Dan, six months ago, you bought these high performance running sneakers, we we have another pair a new style just came out – yours are probably worn out, we’ll give you 5% off if you buy them direct from us, because we don’t have to pay the third party middleman. So in almost all cases, having that one on one relationship is the best.
You can market to them, you can create a community you know, Nike is not just about the actual performance of the shoe or the or the shirt. There’s a you know, a cult to it, there’s a cachet to it. Certainly that’s true of Lululemon, you know, and Warby Parker, and some of these other brands, you know. Tesla would be another great example. But you want a company to be able to say you’re a customer, here’s some incentives. Think of it like loyalty programs don’t actually have to do a loyalty program, but they certainly could.
So if Nike says spend $300 a year and we’ll give you you know, 10% off your next purchase, or we’ll invite you to an event at our store or whatever it is – you know, I’m a sucker for that kind of thing. I’m a big fan of being in loyalty programs and getting stuff and getting access to things. So there’s so much more ability to manage that relationship. Because when a Finish Line says, You know what, Nikes not that hot, right now, let’s feature Reebok in the best spots in our store. Nike can’t really control that. I mean, they can because they have leverage. But if they’re in a time period where they don’t have that leverage, because maybe they they don’t have you know, maybe Michael Jordan becomes not as big a brand 20 years from now and the new hot thing, you know, I don’t know LeBron James, his kid, Bronny. If he has a lot of sneakers, you know, maybe that’s the hot thing, and maybe they’re Adidas. And that is featured while Nike still has this, this email list this marketing list, where they know a lot about you. When you know your sizes, what kind of shoes you wear, that, you know, are you buying exclusive – they know if you’re a sneakerhead. So there’s every ability to build on that relationship. And I’m a giant fan of that as an investor.
Simon Erickson 32:16
Okay, so direct relationships with with customers is important. Let me wrap this all together then and ask you, you know, with everything you know about retail, and everything that we talked about on this podcast, can you give me maybe one or two investing ideas that you think are doing this right, and are poised to succeed with all the changes happening in the industry right now? And then maybe also, one or two bad examples that you think on the wrong side of these changes are not doing very well for investors, publicly traded companies?
Dan Kline 32:43
Sure. The biggest winners are gonna win. So Amazon, Walmart, Target are kind of no brainers. Are they going to be quick risers? No, probably not, you know, Target might have the most upside there just because it was maybe at the lowest place for a while. Is BestBuy gonna keep doing? Well, probably, I think Dick’s is a little bit under the radar, their numbers have been really, really good. And then you want to look at retailers that just know their game. I walked into Dollar General for the first time in a very long time over the weekend, and I forgot how crummy Dollar Generals are. But they know their market. They open a store, it gets to 1.4 million, whatever the number is, and then they open a store like half a mile down the road. They fully understand, you know, how to serve who they’re serving.
And I would look for companies like that. Ollie’s is another one, Five Below. Companies that that – Marshalls, TJX, you know, which is not something I enjoy. I don’t want to go to a store and be like, I need a black shirt, you know, in this size, and they’re like, yeah, today we just have scuba. We don’t have any black shirts. That, to me is not fun. But like my mother, when it’s not a pandemic, we’d go to Marshall’s like three or four times a week like it’s it’s sport. So those are the winners. We know who the clear losers are like, you, obviously Sears and JC Penney but I wouldn’t invest in, say Macy’s or Kohl’s.
I can make an argument where there’s a Kohl’s turnaround, I think they’ve done some things right. I think there’s a real potential to expand their partnership with Amazon to display some of those Amazon clothing lines that that could be a differentiator. But if you had to ask me “Do I think Macy’s and Kohl’s make it?” I think they end up as private companies that are smaller than they are now. I shop at Kohl’s I think it’s important important store for families so I I root for them to survive.
You mentioned Tractor Supply earlier. Tractor Supply is something that Amazon can’t compete with. Tractor Supply sells chicks -there’s once a year you can order live baby chicks because you are on a farm. They serve a market they fully understand that their relationship with their customer is going to be very, very hard to break and I wouldn’t expect anyone to take them on. So that’s what you want to look at for retail. There’s a lot more retail winners than you would think. But basically any mall store, I would stay away from. Do I think the Gap and Victoria’s Secret, which are both confusing because Old Navy is successful and Bath and Bodyworks is successful? Do I think those chains will make it in some form? Yes. Are they good investments? No, they’re probably not. So I would really look this. This is a place where you move towards quality.
Simon Erickson 35:27
And as investors in the space one last question for you, Dan. Everybody likes to look at the comps number, right comparable store sales. But as investors are the things that are more important than comps that we should be paying more attention to?
Dan Kline 35:39
Especially post pandemic, because you’re going to see a lot of stores, a lot of them have bad comps next year. And that could include Target and Walmart. Why? Because during the pandemic, they became major grocery hubs. Now, are there some cases where – yes, a lot of people are going to keep buying groceries at Target and Walmart, but a lot aren’t. A lot are going to go back to their neighborhood grocery store that maybe doesn’t have curbside pickup, maybe doesn’t have the sophisticated online ordering.
Grocery for Target or Walmart is a terrible margin business that is to get you to become a customer and go into the store and buy something else. So if you look next year and say Walmart last year, you know, did 100 billion in sales for the quarter, and this year, they only do 97. But that 97 was more profitable, you’d rather be more profitable. Then something like Dollar General, which we just brought up, comp sales don’t increase at Dollar General their stores get to where they get to. The number for them is how many stores did they add. They’re launching a new concept. Is their new concept of working? You really need to know for the next 12 months, even stores where comps used to matter – they don’t matter right now. And you really need to look at did this store make money.
If I start spending less money on COVID mitigation and bonuses for workers, I don’t need to sell as much. And if I sell more, you know high end items that have a lot of margin or whatever. Like Target, start selling more baby supplies because a lot of people were stuck in the pandemic. And there’s a lot of theories that there will be a baby boom because of the pandemic – we don’t know if that’s true yet or not, but it could happen. Well, the margins on baby products are really, really high. If they sell more of that, and less, you know, food, they’re probably good. If they sell more Ulta beauty and less, you know, soda, they’re going to be in a better situation.
So you really need to get into the nuance of it. And I would almost I would almost throw out any first day reporting on any of the major news sites. Retail wire retail dive there are some great sites that can interpret retail. The mainstream business media tends to be pretty lazy and look at just those very basic metrics. Those generally more so than ever because we really had some like wow like sales were up 22% but we actually made less money than we did a year ago because of all the added expense or all the safety and mitigation we had to do. So it’s gonna be a busy year for me explaining these numbers would be my guess.
Simon Erickson 37:35
I look forward to it Dan and I always appreciate learning more about the retail industry as we kind of peel back the second and the third layer of the onion to figure out what’s really going on out there thanks for switching seats with me you know rather than being a host as you typically are for 7investing now live stream being the guest on our podcast is how can I really appreciate it.
Dan Kline 38:29
It is very nice to not have to think am I talking too much which is something I think on 7investing now quite a bit.
Simon Erickson 38:35
Well we really appreciate you spending the time to teach us more about retail again again, Dan Kline, our very own lead advisor here at 7investing. Thank you for tuning into this episode of our podcast. We are here to empower you to invest in your future. We are 7investing.
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