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As the creator of the Web-only Retail Index, Seeking Alpha followers asked me to opine on how Cyber Monday may impact valuations of public web-only retailers during the week of November 28th 2011 and then again during earnings season.
With adjusted median EBITDA multiples in the Web-only Retail Index already up 17% to 9.5xs in October, it is quite possible that shareholders may end up with a lump of coal in their stocking.
First a disclaimer. I hold web-only retailers in high regard and earn my living as an M&A investment banker in the sector.
My purpose is to share actionable investment commentary. In other words, is there a valuation discrepancy? Based on my judgment as a banker in the sector I believe there may be such a discrepancy.
Cyber Monday was unofficially coined in 2005 and has become one of the busiest for on-line retailers.
Why do consumers say they shop online?
- Consumers cite free shipping as a primary incentive to shop online. 74% of online consumers responding to a holiday survey from consulting firm Accenture in September said the biggest incentive for shopping online is free shipping.
- The second most frequently cited incentive is finding better discounts (60%) which can sometimes stem from sales tax advantages (see: Valuations Of Web-Only Retailers Could Drop 25%)
What are the warning signs that Cyber Monday deals may tank valuations?
- More than 92% of e-retailers say they’ll offer consumers free shipping on orders during the holiday gift-buying season, up from about 85% that said the same last year, according to survey results by Shop.org, the e-retail arm of the National Retail Federation trade group.
- The financial media sources sound bearish on overall spending which can often be self-fulfilling (e.g. “October’s Retail Sales Hint at Weakness after Strong Year” (Investor’s Business Daily) and “Tepid Retail Sales Fall Short” (Wall Street Journal)).
- Continued high unemployment (9.1%)
- The National Retail Federation expects shoppers to spend 4.6% less this year on gifts, or an average of about $516.
What is the “Cyber Monday Bump” and is it the silver lining in the cloud?
The “Cyber Monday Bump” (in stock prices) is a phenomenon that was first observed in 2009 and 2010 by Abe Garver. In essence it predicts that there will be a 4%+ median increase in the weekly stock performance of web-only retailers immediately following Cyber Monday.
A possible explanation for the Cyber Monday Bump relates to the amount of attention Shop.org, Forrester Research and dozens of news organizations give to the issue of year over year gains in on-line revenue. Investors love what is reported and voila, web-only online retail stocks go up.
Enjoy the Cyber Monday Bump, but prepare for the Dump.
There is no such thing as free shipping from the perspective of the retailer. It is expensive and cuts into profit margins. Instead of cheers, there may be January boos during earnings season.
Because 92% of e-retailers say they’ll offer consumers free shipping (up 7%) on orders during the holiday gift-buying season, I predict there will be a 15% correction from the pre-Cyber Monday Bump levels. Buckle your seatbelt.
Web-only Retail Index companies include Amazon, eBay ( EBAY), O.co (also known as Overstock.com) (OSTK), United Online (UNTD), Vistaprint (VPRT), 1-800-Flowers.com (FLWS), Nutrisystem (NTRI), Blue Nile (NILE), U.S. Auto Parts (PRTS), Vitacost (VITC), PedMed Express (PETS), Coastal Contacts (CSOAF.PK), Bluefly (BFLY) and Stamps.com (STMP).