FYI | May 31 2017
By Peter Switzer, Switzer Super Report
Retailers are not as bad as the market thinks
I don’t believe “the Amazon monster that devoured retail" story, at least in its goriest details, as prophecised by market predicting luminaries. However, I have to admit I recently did a very Amazonian shopping thing, which shows its potential threat.
However, as my story reveals, it shows the potential that might exist for those local retailers who are currently portrayed as lambs awaiting the Amazon slaughterhouse!
Despite my general feeling that when it comes to a lot of stuff you might buy at Harvey Norman’s or JB Hi-Fi, you might want to show up and see the product in real life, I have to confess I did buy a fridge online!
That said, it was for an investment property and it was well-priced. It was delivered, unboxed and set up, all for $58! And guess who sold it to me? Yep, one of Gerry Harvey’s stores.
If it was a fridge for my home, my wife and I, (especially my wife) would have wanted to show up and see it in real life. And that’s our retailers’ opportunity.
When I look at the huge sell off of JB Hi-Fi since February (after it reported better than expected) and Harvey Norman as well, it reminds me of the madness that prevailed when BHP slumped to $14 or so.
Where were the market luminaries then? I was pleading for a handful of experts to recognise the market’s over-the-top selling but I think only CMC’s Michael McCarthy was a brother-in-arms, as he thought the big Australian looked like fair value at $20!
I know my colleague Paul Rickard is flabbergasted at the market’s set against JB but he’s also wary of “standing in front of a moving train” stocked by short-sellers, as he put it recently. Prime Value’s ST Wong likes JB Hi-Fi and he’s a guy who’s always on the lookout for value in market screwiness. And good old Michael McCarthy again is on a unity ticket with me on how good value seems to be lurking with JB.
Be clear on this: I know Amazon will hurt local retailers but by how much? And over what time frame?
In February, JB was valued at $29.38. Now it sits at $23.12, which means it’s down some 21%, which is a lot of damage from a company that hasn’t even started competing beyond what it has been doing when JB was close to $30!
My willingness to go into bat for local great retailers become more fervent on Friday, our time, when the news for Best Buy [US] made a lot of experts start thinking twice about their expertise.
Shares in Best Buy soared 21.5%. Shares in Sears were up 13.5% on Thursday, as I reported, but how come, with Amazon out there ‘killing’ retailers?
As CNBC put it: “Best Buy showed signs in the latest quarter that it has the right formula to go up against Amazon, as more shoppers ring up their purchases online.”
So the Black Knight of retail — Amazon — might be formidable but the white knights of conventional retail, where making profit remains the normal goal, might not be dead yet!
It makes me ask: “Could JB Hi-Fi do the same?”
Best Buy shares hit an all-time intraday high of US$60.14 on Thursday, after analysts, who were expecting a 1.5% decline, were wrong. Admittedly, even the company was worried too but it looks like Amazon was over-hyped, as I’ve been predicting.
Not surprisingly, the recent sell off silliness was cautiously questioned by our market, with JB up 3.26% on Friday to $23.12.
Best Buy doubters wanted to blame the good news for ‘old fashioned retail’ on ‘delayed federal tax refund checks’ and they were helpful. However there’s no reason why these wouldn’t have helped Amazon too.
“There is little doubt that the delayed arrival of tax refunds provided buoyancy to the [electronics] market later into this quarter,” GlobalData Retail managing director Neil Saunders wrote in an email, CNBC reported.
Nevertheless, “the impact was helpful but somewhat limited,” Saunders said. “Best Buy’s performance is down to more than just consumers temporarily having a bit more money to spend.”
And to rub it into the Amazon-loving retail doomsday merchants, Best Buy’s number crunchers tip second-quarter comparable sales to grow between 1.5% and 2.5%.
Explaining the good story, Best Buy has got serious about its online pitch but has also lifted its in-store customers experience/service, which Amazon can’t match. Over the first quarter, Best Buy’s digital sales grew by more than 22%.
Best Buy has gone on the offensive to beat Amazon, where it has strength. And that’s customer service — with things like Geek Squads and in-home advisory service. A few months ago, I interviewed Gerry Harvey about Amazon coming and he warned me that he saw four threats from the big US category killer. However in his typical style, Gerry reckoned he had strategies for all four and that he would win!
The likes of JP Morgan/Ord Minnett (see Buy/Sell/Hold) gave our retailers the thumbs down last week but these guys aren’t infallible and were not talking me into BHP, when I was pleading for the smartest guys and gals in the room to give me a leg up!
I think the analysts are making the mistake of over-estimating Amazon’s quick success and the fact that local businesses will just lay down their weapons.
The following fact could be a timely piece of prophecy — Best Buy’s share price is up 57% over the past 12 months, and up about 18% for the year-to-date period.
But it hasn’t been by good luck, as the company has created a very positive consumer experience. As one retail expert described it: “Step inside one of the company’s stores and it’s like walking into the Willy Wonka Chocolate Factory for gadget-geeks — this is all by design.”
That costs money and they’ve got into aggressive pricing but it’s paying off, with Thomson-Reuters tipping its first quarter EPS would be 40 cents but it ended up being 70 cents!
Back in April, Darren Fonda, the Associate Editor at Kiplinger.com, tipped Best Buy could surprise market experts. This is what he wrote: “The electronics chain is in a good position to stand up to the world’s largest online retailer.”
And this was despite the fact that 54 retailers in the US were at four-year lows with their stock prices in late April.
Worse still, Amazon.com is predicted to account for 50% of all internet-based US retail sales by 2021! Brokerage firm Needham & Co. came up with this guess, based on the fact it had about one-third of sales in 2016.
Fonda says Best Buy has:
- A new CEO.
- Price-matched Amazon.
- Increased customer support services — the Geek Squad.
- Created in-store experiences.
- Competed more professionally online.
And this is what Gerry, JB and the other retailers, such as Peter Birtles’ Super Retail Group, have to do.
The mistake the retail stock trashers might be making is that they’re assuming our local businesses will lay back, close their eyes and think of pre-Amazon days.
I don’t think they will but they have to start loving their customers like never before. The Best Buy story is the best one they’ve seen in years but they have to learn from it and fast!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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