By Jeff Bailey
One group of retailers outperformed the S&P 500 by 23% over the last 22 months, while a second group lagged badly behind, beating the S&P by a mere 9% during a period of rapid escalation of retail stock prices, according to work by William Blair & Co. analysts.
The crucial difference: the first group -- based on product overlap and price comparison with Amazon (AMZN), and on the relative convenience of shopping at the retailer - is rated as having below-average risk of losing market share to Amazon. This group includes Walgreen (NYSE:WAG), Cabela's (NYSE:CAB) and T.J. Maxx (NYSE:TJX).
^SPX data by YCharts
^SPX data by YCharts
Amazon's amazing sales growth is obviously coming at the expense of other retailers. Identifying which ones - and which ones have credible defenses to Amazon - is crucial to making wise decisions about retail stocks.
US Retail Sales data by YCharts
Mark Miller, an analyst at William Blair in Chicago, and his colleagues have been for the past two years engaged in a massive data-gathering exercise. Monthly, they check web sites of about 40 retailers to see how much product overlap the chains have with Amazon. Best Buy, for instance, has 72% overlap. Vitamin Shoppe has 79%. Ulta has 74%.
Then, Miller & Co. check prices. (By the way, this level of initiative is not typical among securities analysts. If you run into Miller, tell him job well done.) Best Buy was, on average, 16.6% more expensive than Amazon in April. Vitamin Shoppe 17.4% pricier. Ulta 15.7% pricier. That's called vulnerability. Unless the shopping experience is compelling, these chains are asking to have their clocks cleaned. (The formula for which chains are vulnerable and which aren't is 20% based on product overlap, 40% on price comparison and 40% on the shopping environment.)
Of those less vulnerable, Walgreen has 49% product overlap and is 17.2% pricier than Amazon. Cabela's has 35% overlap and is 12.2% pricier. And T.J. Maxx, incredibly, has just 17% product overlap and is 24.3% pricier.
Walgreen benefits from shopping habits - people often wait to buy toothpaste, shampoo and over-the-counter drugs until they've run out, and the drug store chain has more than 8,000 locations.
At YCharts, looking at Miller & Co.'s prior research on this topic, we've in the past labeled Amazon the Suicide Bomber of Retail, since in slashing prices and providing free shipping it has ruined or seriously undermined the businesses of several competing retailers, and in the process rendered itself only marginally profitable. Overall, Miller & Co. reports, Amazon prices are about 12% cheaper than the competition. And Amazon has largely forced the retail industry to match its free shipping policy; in the week ended May 10, 89% of retailers offered some free shipping, up from 74% a year earlier.
AMZN Revenue TTM data by YCharts
As you see from the stock chart above, investors seem to care not that Amazon's profit margins thinned dramatically during its latest growth spurt. Fans of the stock are enamored of revenue growth and, one supposes, must figure that Amazon will become very profitable once it's killed off a few more brick-and-mortar retailers. But, given its growth is largely based on heavy discounting, it's difficult to see how Amazon will manage to fatten margins. All the retailers aren't going broke, after all.