Amazon.com's (AMZN) Prime Day – the e-commerce company's annual discount blowout – typically descends in the summer, acting as a “Christmas in July” of sorts for online shoppers.
But COVID-19 has forced Amazon.com to push Prime Day into October, and there are several retail stocks to watch for a potential pushback.
Consumers have expressed less interest in shopping on Black Friday and Cyber Monday specifically compared to previous years, according to Accenture research. And a dreadful 2020 for retailers already had many retailers planning to nudge shoppers into holiday spending well earlier than Black Friday – some into October.
But Amazon.com's announcement of an October blockbuster has forced many retailers' hands. Simeon Hyman, global investment strategist at fund provider ProShares, notes that 2019's Amazon Day – a two-day affair – resulted in a 71% year-over-year spike in sales to $7.16 billion. And most other retailers simply can't afford to allow Amazon to take a similarly large chunk out of their holiday-adjacent sales.
Here are five stocks to watch as “Prime Day” nears. Hyman notes that while Amazon.com “remains a superpower in e-commerce,” these five businesses are worth keeping an eye for their responses.
- Market value: $401.8 billion
- Analyst ratings: 18 Strong Buy, 8 Buy, 7 Hold, 2 Sell, 0 Strong Sell
Let's start with Walmart (WMT, $141.80) the largest retailer in the world – and thus the company most likely to butt heads with Amazon this fall.
“What kind of deals will Walmart offer to keep up with Amazon?” asks ProShares' Simeon
Hyman. Fortunately, Walmart has an answer to the ready.
Walmart last week announced its “Big Save Event,” which actually will start earlier than Prime Day by a couple of days. While Amazon's Prime Day will run Oct. 13-14, Walmart's Big Save Event will begin at 7 p.m. Oct. 11 and run through Oct. 15.
Walmart has justified many analysts' thoughts that it was the retailer best-positioned and best-resourced to take on Amazon.com. The competing October sales bonanza is just one of the ways Walmart has gone punch-for-punch with Jeff Bezos' firm. Recently, for instance, the company launched its Walmart+ subscription service to compete with the Amazon Prime service.
“The skeptics are sure to point out that this program might not be appealing to the casual WMT.com customer, who may be spending a lot on AMZN. It's these customers who are valuable since they likely account for a high percent of overall online shopping,” writes UBS analyst Michael Lasser, who rates Walmart's stock at Buy. “Yet, there's value for WMT to build deeper connections and solidify its relationship with its more loyal customers. Assuming these shoppers are spending elsewhere online, WMT can grab more of their total spend.
“Plus, for every 1% of its regular weekly shoppers who sign up, WMT will generate ~$150mm in annual subscription fees.”
But Hyman also points out a couple of concerns that put Walmart among the retail stocks to watch right now.
“Walmart's margins have been deteriorating as it has grown its online business,” he says, adding, “Walmart may also work to shift its mix a bit away from the rapidly growing, but still margin-challenged, grocery segment.”
- Market value: $80.8 billion
- Analyst ratings: 12 Strong Buy, 6 Buy, 8 Hold, 0 Sell, 2 Strong Sell
Target (TGT, $161.49) is no stranger to running promotions right up against Prime Day – the company's “Deal Days” ran in July 2019, but will be moved to Oct. 13-14 this year. Target will offer savings on hundreds of thousands of products, including Target-exclusive brands, and Target RedCard holders will get an extra 5% off purchases.
Target also plans on offering same-day delivery with Shipt, as well as contactless drive-up and order pickup – Hyman calls the latter “a key part of its uphill battle to mitigate the high cost of home delivery.”
Argus Research analyst Christopher Graja writes that Target “is well positioned to weather the COVID-19 pandemic: it appears to be gaining market share and its e-commerce infrastructure is working well. After the crisis, we expect CEO Brian Cornell to work diligently to help the mass retailer become the exciting, French-sounding “Tarjay” once again.”
That said, Target still has its hills to climb.
For one, “We expect earnings to face pressure from intense competition and increased spending to improve the company's e-commerce capabilities and merchandise offering,” Graja continues.
Also, TGT shares have weathered 2020 well – perhaps a little too well for new money. Shares have run 26% higher year-to-date, leading Graja, who has a Hold rating on the stock, to call TGT shares “fully valued at current prices.”
A strong October performance against the likes of Prime Day and the Big Save Event could help lift that outlook.
- Market value: $23.7 billion
- Analyst ratings: 7 Strong Buy, 3 Buy, 5 Hold, 0 Sell, 0 Strong Sell
Chewy (CHWY, $57.52) is an online retailer that focuses on pet food and other pet products, and it effectively co-dominates the space alongside Amazon.com. The company has an intensely loyal following – “roughly 70% of Chewy's business comes from subscriptions,” ProShares' Simeon Hyman says – so CHWY naturally is among stocks to watch if Amazon tries to claw away at that this Prime Day.
CHWY shares have nearly doubled year-to-date thanks to something of a perfect storm. Not only did the COVID-19 pandemic put a spotlight on e-commerce stocks, but it also sparked a wave of pet adoptions that helped bolster the company's potential customer base.
Chewy continued to impress analysts with its latest earnings release, which dropped in early September. Credit Suisse's team, which has an Outperform rating on shares, said that Chewy's EBITDA (earnings before interest, taxes, depreciation and amortization) topped their estimates and that the company's valuation isn't “fully reflecting its rapid growth trajectory and longer-term profit opportunity.” UBS's Eric Sheridan maintained his Neutral position but raised his 12-month price target from $49 per share to $55 “to reflect raised estimates.”
And William Blair's team (Outperform) simply lavished praise on CHWY, writing, “We believe it speaks to the high visibility in the model that management is even providing guidance against the current backdrop. By the same token, we believe guidance remains understandably conservative, as has been proven out by notable upside reported in the first and second quarters thus far.
“Meanwhile, even under these tempered assumptions, the company should continue to capture over 50% of incremental dollars expected to move online in the pet space in 2020, reinforcing its dominant position online as channel migration accelerates.”
“It will be informative to look at what Amazon does in the category on Prime Day,” Hyman says. So far, Chewy hasn't announced any sort of event with a similar timeline as Prime Day.
- Market value: $3.2 billion
- Analyst ratings: 3 Strong Buy, 0 Buy, 3 Hold, 1 Sell, 0 Strong Sell
Qurate Retail (QRTEA, $7.64) is something of a retail conglomerate made up of seven brands: shopping channels QVC and HSN, e-commerce platform Zulily, home furniture brands Ballard Designs and Frontgate, clothing/home décor retailer Garnet Hill and home décor retailer Grandin Road.
The Qurate Retail name has only been around since 2018, as the rebrand for Liberty Interactive – a shifting group of brands controlled by billionaire John Malone of Liberty Global (LBTYA) fame. For those of you familiar with Warren Buffett stocks, you'll be familiar with Malone, who is responsible for a sprawling empire of media and communications assets, as well as tracking stock that represents Liberty's holdings in other companies such as Sirius XM (SIRI).
Hyman points out that “Qurate continues to integrate their online and legacy direct channels,” but also looks at a structuring question: “Does their recent one-time dividend and preferred stock distribution reflect a change in pace and strategy?”
UBS's Eric Sheridan writes that “the preferred dividend is a unique & efficient method for returning capital to shareholders” and that he sees the preferred stock “as a positive signal of (management) and the Board's confidence in free cash flow generation, even after preferred dividends.”
But he's not as rosy about Qurate's actual operations. UBS, which maintained its Neutral rating, lowered its EBITDA estimates to reflect “ongoing margin headwinds on fulfillment, a “mix shift towards lower income margin home goods & away from higher margin apparel” and “continued marketing investments to support new customer growth.”
It'll also be interesting to see how this group of brands is able to stand out on Prime Day – and throughout the holiday season – against juggernauts like the ones we've mentioned.
- Market value: $17.3 billion
- Analyst ratings: 12 Strong Buy, 4 Buy, 0 Hold, 0 Sell, 1 Strong Sell
Etsy (ETSY, $136.69) is the arts and craft corner of the internet – a global marketplace of handmade items and craft supplies covering everything from clothes and jewelry to furniture and decorations.
Hyman says “their differentiated positioning has been quite strong, but Etsy might be on a trajectory of becoming more mainstream,” pointing out that Etsy was recently added to the S&P 500.
Etsy is yet another e-commerce stock that has run rampant throughout the COVID crisis, with shares more than tripling so far in 2020. Etsy has been flooded with new users, adding roughly 12 million buyers during the second quarter, compared to a typical 1 million per quarter.
“We see Etsy as having one of the best opportunities for sustainable growth across ecommerce as it uses the strength in the current environment to familiarize consumers with multiple use cases and drive improvements in frequency,” write Wedbush analysts, which rate the stock at Outperform.
“As consumers are faced with limited retail options during the pandemic, Etsy views this as an opportunity to gain consumer mind share, and sees its total addressable market (previously defined as the $100B market for online sales of “special” goods across six core geographies) expanding multiple times over as the lines between online and offline commerce continue to blur,” write Canaccord Genuity analysts Meria Ripps and Michael Graham, who rate the stock at Buy and raised their price target from $130 per share to $160.
Etsy often offers sitewide promotions, but it hasn't yet announced any sort of rival event to Amazon's Prime Day. Still, its unique spot in e-commerce puts it among the stocks to watch as Prime Day nears.
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