🛍️ Cyber Five Deep Dive

Happy Sunday to everyone on The Street.

Today we’re doing a retail deep-dive since we find ourselves sandwiched between two of the biggest shopping days of the year: Black Friday and Cyber Monday. Including Thanksgiving, this short window generates nearly one-fifth of all ecommerce sales for November and December. Oftentimes referred to as “Cyber Five,” most of the shopping is now done from the comfort of our own homes.

This is remarkable given the fact that just three decades ago, Sears was the world’s largest retailer with over 3,500 locations (including Kmart). Now the chain hardly exists. Less than 24 full-size stores are still operational, and the malls they anchored certainly don’t see the same foot traffic they did when Seinfeld was still on TV.

What’s next? How far will the Cyber Five term be stretched? If Zuck has anything to say about it, we’ll slip on our Oculus Rift virtual reality glasses right after Thanksgiving dinner and voyage into a digital mall experience.

Until then, if you are doing any online shopping today, click here to fill out our end-of-the-year survey. We’re giving away a $50 Amazon gift card to one lucky winner. If you filled it out already, thank you. You’re already entered to win.

Enter for a chance to win: Click here to take our year-end survey

Review

All three major indexes gained ground last week. The mood was optimistic on Wall Street heading into the weekend after the FOMC’s meeting minutes from earlier this month hinted at smaller rate hikes in the future.

The Fed has been aggressively tightening its monetary policy in a bid to fight inflation, which has put pressure on equities. While the previous four rate hikes have been 75-basis-points, many anticipate a 50-basis-point hike next month. With that said, jobless claims came in at 240,000 for the week ending November 19, which was higher than expected. This signals the labor market could be weakening, which also suggests the Fed could take a more dovish turn in 2023.

On the economic data front, durable goods orders for October exceeded expectations. The Commerce Department reported that single-family home sales rose in October on a monthly basis, which surprised analysts, given how mortgage rates have risen. Overseas, there continues to be uncertainty regarding China and what officials will do regarding its COVID-19 restrictions.

That’s been impacting the price of oil, given lockdowns within the world’s second-largest economy could hamper demand. The price per barrel slipped Wednesday for both international standard Brent crude and US benchmark West Texas Intermediate.

In company-specific news, while soccer fans are mostly buzzing about the World Cup, English Premier League club Manchester United saw its share price pop after disclosing that it’s exploring a sale. Apparently, Apple is interested in purchasing the club.

High-end retailer Nordstrom beat earnings expectations for its third quarter, but also cut its profit outlook, citing slower-than-expected early holiday shopping and ongoing supply chain issues. The company is taking a hit as it offers discounts in a bid to clear out excess inventory.

Embattled investment bank Credit Suisse issued a warning that it expects a pretax loss in excess of $1.5 billion during its fourth quarter. The company’s executives note the current macroeconomic environment has hurt client activity, while wealthier clients have also withdrawn investments and savings.

For the week as a whole, inclusive of Black Friday’s abbreviated session, the Dow Jones Industrial Average rose 2.39%. The S&P 500 added 2.02%, and the Nasdaq Composite gained 0.73%.

Preview

Tomorrow, the Dallas Fed will release its manufacturing index for November. The survey tracks manufacturing activity for the greater Dallas-Fort Worth area. In October, the index dropped 19.4%, which was more than expected.

Tuesday, both the S&P Case-Shiller Home Price Index for September and the Conference Board’s Consumer Confidence report for November are due. In August, home prices cooled significantly, as higher mortgage rates made an impact on demand. Consumer confidence fell to a three-month low in October.

Wednesday, the labor market will be in focus, with both ADP’s private jobs report for November and the JOLTs for October due. Private payrolls rose 239,000 in October, which was better than expected. Meanwhile, job openings surged higher in the September JOLTs, or Job Openings and Labor Turnover Survey. These trends are notable considering the Fed’s attempts to cool off the economy with inflation at its highest level in decades. The second estimate of the US third-quarter GDP is also due.

Thursday, the Institute for Supply Management will issue its November manufacturing PMI. In October, the manufacturing sector grew. October’s personal income will also be published, as well as initial and existing jobless claims.

Friday rounds the week out with the November jobs report. This includes individual metrics such as the unemployment rate, which ticked up to 3.7% in October. Last month’s nonfarm payrolls, labor force participation rate, and average hourly earnings are also part of the report. Investors will be paying close attention to this slew of labor market data to try and predict how the Fed will react.

On the earnings front Chinese ecommerce giant Pinduoduo (PDD) will share its most recent earnings data tomorrow.

On Tuesday, software company Intuit (INTU) will publish the results of its first quarter fiscal year 2023. Also, system software company Workday (WDAY) is scheduled to post earnings.

Wednesday, fellow software developer Salesforce (CRM) is set to hand in its latest report card. Discount store chain Five Below (FIVE) is also hosting a conference call to discuss its third-quarter earnings, as the retail sector comes into focus ahead of the holiday shopping season.

Thursday, grocery store giant Kroger (KR) will discuss its third-quarter results. Reports from Ulta Beauty (ULTA) and Dollar General (DG) will also be released.

Rounding out the week in earnings on Friday will be footwear-focused retailer Genesco (GCO), which unveiled its new corporate headquarters in Nashville, Tennessee earlier this month.

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Not All Retails Stocks Are Winners This Holiday Season

Consumers Have Little Reason to Rush

FOMO isn’t in the air this holiday season, which means consumers won’t be rushing to stock up on any must-have gifts and gadgets. Pandemic supply chain delays have been largely worked out, retailers are sitting on excess inventory, there isn’t a hot toy parents are coveting for their kids and door-buster sales have been going on since October. Add record-high inflation to the mix and it's not surprising the sense of urgency that kicks in as soon as turkey dinner is served, isn’t there this year.

That doesn’t mean holiday sales will be a bust. The National Retail Federation estimates retailers will bring in anywhere from $942.6 billion to $960.4 billion, marking a 6% to 8% increase. It does mean consumers are being choosy and investors have to be too.

Value, Luxury Rule

Not every retailer is going to be a winner this holiday season. Value is clearly in, which is why retailers like Walmart (WMT), Dollar Tree (DLTR), and Dollar General (DG) should get a bigger share of consumer wallets.

It’s not just with budget-conscious consumers either. When Walmart reported fiscal third-quarter results last week the retailer said it saw more shoppers with incomes over $100,000 than previously. “They went to Walmart because there’s a great perception of value there — even among the high-income consumers,” said Katie Thomas, who leads the Kearny Consumer Institute, an internal think tank at Kearney in a recent CNBC interview.

It makes sense. A recent Goldman Sachs study found Walmart’s prices are 12.5% lower than rivals based on a basket of 38 items spread across different product categories. Dollar General is in second place with prices 6.4% lower than competitors.

Target’s Stuck in the Middle

Luxury items are expected to be another sweet spot this holiday season. Higher earners have more money to drop on gifts and aren’t sensitive to inflation. That could benefit retailers like Lululemon (LULU) and RH (RH). Beauty is another category that should do well benefiting retailers including Ulta Beauty (UTLA).

The ones that may be singing the holiday blues are the retailers stuck in the middle. They aren’t perceived as a place to get deals or high-end goods. Target (TGT) is a perfect example. When reporting quarterly results this month it said it saw a “precipitous decline” in spending in late October and a spillover effect in November. Part of the problem is consumers don’t see Target as a place to save. “You go in for two items and come out $150 later,” says Thomas.

Not all retailers are going to land on the good list this holiday season. The ones that are offering value and luxury should have stockings full of sales. Those stuck in the middle may end up with a big heap of coal.

Amazon is Losing its Luster With Customers

Customer Service Complaints Growing at the E-commerce Giant

Amazon (AMZN) is losing some of its luster with customers and it couldn’t come at a worse time. With holiday shopping in full swing, Amazon and other retailers need all the loyalty they can get. Inflation is still soaring and interest rates are rising, pressuring many households’ budgets. Consumers are looking for value, speedy delivery times, and top-notch customer service. If they can’t get it at one retailer, they’ll find it at another.

Amazon is feeling the effects of all this. It has seen growth and profit decline and earlier this month it announced plans to cut as many as 10,000 jobs in its retail, devices, and human resources units. The e-commerce giant’s thousands of warehouse workers won’t be impacted by the layoffs, which is good news for the holiday rush.

Delivery Delays, Search Frustration

So, what are customers griping about when it comes to Amazon? According to the results of recent surveys, customers are expressing frustration with quality and delivery times, which could be pressuring sales. Brooks Bell, a consulting firm, conducted a survey of about 1,000 U.S.-based Amazon customers earlier this year and found close to one-third said they regularly received products late or received items of low quality. Customers are also unhappy with the search aspect of its platform. Amazon is making more money by increasing the number of third-party sellers and is letting sellers pay to appear at the top of searchers in certain product categories. That is making searching for items more confusing.

A recent Evercore ISI survey of Amazon customers found 79% were extremely or very satisfied. It's not as bad as during the pandemic when just 65% of customers said they were happy with Amazon but it's off its peak of 88% seen almost ten years ago. Evercore ISS pointed to the expansion in sellers and search advertising as undermining the quality of the Amazon marketplace.

Amazon is Still the Leader

Slipping customer satisfaction is something to keep an eye on but Amazon is still by far the leader in e-commerce by a fairly wide margin. It has more than 200 million Prime customers who pay yearly for memberships. Of those customers, around 98% have been subscribers for two or more years, according to research from Consumer Intelligence Research Partners. Amazon has taken steps to improve search on its platform including rolling out a product comparison tool and enhanced search features. As for its delivery times, Amazon says that fluctuate based on the time of day, demand, and customer location.

Amazon isn’t the be-all-end-all it used to be, even if a majority of customers are still satisfied. It may not mean anything today but it's worth keeping an eye on, especially during the holiday selling season.

Invest in Deep Tech

NanoVMs is a California-based company that is creating an operating system designed for today’s generation of cloud infrastructure.

The OS was built for cloud-based computing; utilizing a unikernel approach that takes up minimal resources and space, all while improving application speed and computer security. NanoVMs offers software solutions, subscription services, and technical support from industry experts. Here are a few reasons to consider investing:

• NanoVMs has received revenue from the US Airforce, including an Indefinite Delivery, Indefinite Quantity Contract (up to potentially $950M in value) for US Air Force Advanced Battle Management System (ABMS).

• Since founded in 2015, NanoVMs has raised over $2.4 million in funding, which includes $170k from the Department of Energy.

Learn more on how you can invest here.

Off-Rack Retailers Shine This Holiday Season

Off-Rack is In

The saying, "one man's trash is another man's treasure" couldn’t be truer when it comes to off-rack retailers. At a time when Target (TGT), Macy’s (M), and other retail outlets are trying to unload excess inventory, Ross Stores (ROST) and TJX Companies (TJX) are thriving. They’re buying apparel, accessories, and gadgets for massive discounts and selling these items to value-seeking consumers. As we mentioned above, this cohort seems to be growing by the day. With inflation still running hot, these shoppers are looking for deals and steals. What better place than Ross Stores or T.J. Maxx?

To highlight this trend, look at both companies’ third-quarter earnings reports. Ross reported earnings per share of $1.00 on sales of $4.57 billion. That’s better than the $0.85 per share and $4.37 billion in revenue Wall Street was projecting. TJX’s earnings came in at $0.86 per share, which was six cents higher than the consensus. The off-rack retailer wasn’t able to beat on the sales side like Ross, but investors didn't seem to mind. Its share price has steadily gained ground since releasing results in mid-November.

Ross Stores Among the Standouts

Of the two retailers, Ross is getting more love from Wall Street following its third-quarter report. Analysts like Credit Suisse’s Michael Binetti say Ross Stores is seeing faster same-store-sales growth than T.J. Maxx.

Ross also appears to be improving its EBIT margins at a faster clip. EBIT margins (operating earnings over operating sales) show the true cost of running the business. Ross’s 2022 EBIT margins are about 300 basis points lower than 2019. At TJX, EBIT margins are roughly 70 basis points lower.

“In our view, ROST now offers more torque/leverage to capture above-plan performance and moves to our Top Pick in Offprice,” Binetti wrote in a research report. The analyst raised his price target on the stock to $123 from $99. On Friday the share price closed just below $116.

Investors Get a Deal with Ross

Ross Stores also looks cheaper at the moment. With Ross trading at about 20 times Binetti’s calendar year 2024 EPS, it's cheaper than TJX, which is trading at 22 times his CY24 EPS estimate. Add the potential for margin expansion and Binetti thinks investors get more upside with Ross Stores. So far this year Ross Store’s shares are up about 1.5%. That compares to TJX’s roughly 6% gain.

‘Tis the season to save and what better place than off-rack retailers? The major players should get a lift but there could be some standouts this holiday season. Ross Stores may prove the bargain Wall Street is looking for.

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