Retail Renaissance!

Next week starts the biggest shopping season of the year in US with Black Friday. Millions of people would be heading to malls to spend on holiday gifts. And given that people were stuck at home for last year with only option of online shopping, this year they want to go in malls in person and enjoy the shopping. That brings me to my blog topic - is this the Retail Renaissance? (The Renaissance was a fervent period of European cultural, artistic, political and economic “rebirth” following the Middle Ages)

During depths of COVID pandemic, most of the in-person retail (except for essentials) was closed for multiple weeks. Holiday shopping of 2020 was mostly online. Since people were scared to go out.  Online giants like Amazon did a wonderful job in delivering everything from essentials to holiday gifts. No wonder stocks of traditional retail companies were trading as if they are going out of business. Retail was facing double whammy - short term pain of Pandemic and long term threat of online shopping!

Retail companies were just trying to survive to see another day! After surviving busted 2020 holiday season, 2021 brought new hopes to retail companies. Thanks to some clever financial maneuvering and ardent supporters, most of these companies survived. Looking at multi-fold increases in their stock prices from pandemic lows, it definitely feels like they had rebirth. Let's check out some of the examples:

• Macys (M) - went from $5 to $35
• Kohl's (KSS) - went from $12 to $57
• Bed, Bath and Beyond (BBBY) - went from $5 to $23
• Dave and Busters (PLAY) - went from $8 to $36
• Cheesecake Factory (CAKE) - went from $16 to $42
• Target (TGT) - went from $92 to $250
• Simon Property Group (SPG) - went from $50 $166

And then we have meme stocks like 

• AMC - went from $2 to $40
• Gamestop (GME) - went from $4 to $228

What's next and are there still opportunities in participating in Rebirth of Retail?

As they say - "Never waste a crisis". Looks like at least some players in retail used pandemic induced crisis to transform themselves to deal with long-term threat of online shopping. Let's take the case study of Macy's. This storied department store created strong omnichannel with mix of online and in-person shopping. Looking at latest quarterly results from company, it seems to be working. Despite supply chain issues which many high tech companies are facing, Macy's (as well as Walmart and Target) seem to have good handle on supply chain. Sales thru online as well as Macy's app are growing at double digits. Activist investor Jana Partners is asking Macy's management to separate and list online unit (similar to what Saks plan to do in early 2022) to maximize shareholder returns. No wonder Macy's stock has already climbed from $10 to $36 in 2021 (300% more return than online retail giant Amazon). And despite these big jumps in stock prices, they are still reasonably valued at less than one times sales. If these companies are able to successfully transform with following

• Provide Amazon type customer experience (Free shipping, convenience of returns) 
• Pleasure of walking the aisles and touching the goods before buying 
• Fun shopping experience with families and friends
• Sound financial management for maximum shareholder returns

It's possible to dream returns like Restoration Hardware (RH) whose stock went from $35 to $700 in less than 5 years (Disclaimer - I am not claiming it would happen to stocks like Macy's but it's possible that Macy's stock could beat S&P in 2022). 

Isn't this Retail Renaissance?

Have a great Thanksgiving.

/Shyam

Who ate my donut?

Kids are known to blame their dogs for eating their homework! Looking at one of the photo forwarded by a friend, I can blame supply chain for "Who ate my Donut?"

The Supply Chain issues are seen everywhere - from corporate earnings to weird economics of used cars selling more than they were bought for. Supply chain issues are mentioned in every earning call multiple times - even by companies which are supposed to be all digital. The ports are backlogged with ships lined up for miles to get unloaded. What happened in the world priding itself "just-in-time" and efficient, all connected flat world. Pandemic threw a wrench in this supposedly well-oiled supply chain engine. 

When Pandemic hit in early 2020 across the world, after initial spurt of demand in consumables (remember toilet paper shortage?) demand for travel, autos etc vanished overnight including labor.  No wonder crude price went negative briefly. Governments pumped up trillions of $$ to keep their economies afloat and helped citizens with stimulus. Central banks reduced interest rates to zero and pumped up more money. All of this helped overcome pandemic induced shock. In early 2021, vaccination drives across the world helped reduce the impact of pandemic and people started becoming more comfortable getting out. The demand for everything suddenly jumped. People wanted to get out and spend their savings maybe because Pandemic also reiterated the belief that life can be so unpredictable! So why not live a life little? All of this caused economies to go from demand side shock to supply side shock. Companies were not ready for sudden spurt in demand. Due to complex nature of supply chain, even one small part (more likely some chip) would block production of iPhone, car, toys or clothing.

Policy holders were slow to recognize and act on this - latest CPI and PPI results clearly show that inflation is running hot. Airline tickets are costing 2-3 times of normal prices, hotel rooms are twice as costly, restaurants are at least 25-50% costly. Autos are selling above MSRP. And let's not even talk about housing prices..they are more bubbly than housing bubble of 2006-2008.

So how long would it continue? By many experts, it would continue well into 2022. So if you are looking for your summer vacation, start booking now. Looking at prices for 2021 holiday season, you may want to consider booking your vacation even for 2022 holiday season. When it comes to my Donut, hopefully some of my friends would apply their newly acquired baking skills to make artisan donuts!

/Shyam