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It hasn’t been easy being an online retailer this year. E-commerce stocks have sold off in 2022 as investors ditched tech and growth names, looking to de-risk their portfolios as the economic outlook grew more uncertain amid rising interest rates and high inflation. Investors had already been rotating out of names such as Wayfair and Etsy that had shown strong performance during the pandemic. But with many of these stocks trading at huge discounts, there could be some value for investors, especially if they expect the holiday season will be better than current expectations, which are running rather low. The National Retail Federation expects holiday sales growth of about 6% to 8% over 2021 — about in line with inflation. Within the forecast is a bet that online and nonstore sales will rise between 11% and 13%. But some forecasts are less rosy. Adobe Analytics is predicting U.S. online sales during November and December will grow 2.5% from last year. Baked into that October forecast was an expectation that some consumers would start purchasing gifts earlier this year to spread out the impact of gift buying on budgets that have been stretched by higher prices for gas, food and rent. A slow start to the season “What we’ve seen so far is this holiday season is a complete reversal of what we’ve seen in the last few years,” said Polly Wong, president of direct-to-consumer marketing agency Belardi Wong. “The last few years, we actually saw an incredible amount of sales demand momentum, if you will, really early in the season.” That has not materialized so far, Wong said. Her observations, which are based on data from hundreds of clients she works with, echo findings from Adobe Analytics, released Wednesday, that show a slow start to online sales in November. Through Monday, shoppers have spent $64.59 billion online, up 0.1% year-over-year, Adobe said. Wong said the first two weeks of November have been “very soft,” but trends have picked up “significantly” in recent days. The jump in the third week of month has made her optimistic that sales will improve over the Thanksgiving weekend when shoppers will take advantage of Black Friday and Cyber Monday discounts. Categories will matter, according to Wong. She expects apparel brands to do better than home furnishings, which are still suffering from the overhang of strong consumer demand during the pandemic. According to Adobe, the pace of toy purchases has picked up in November compared with October, but shoppers appear to still be waiting for better deals to buy items such as electronics. Adobe anticipates the five-day period, known for its bargains, will account for 16% of the season’s total spending. ‘Most promotional we have experienced’ In an earnings call at the start of the month, Joey Zwillinger, co-founder and CEO of Allbirds , said he anticipated this holiday season would be “the most promotional we have experienced since launching the company in 2016.” When Allbirds went public last November , it received a warm welcome. Its stock surged 90% in its market debut, putting its value at $4.1 billion. Shares ended Wednesday’s session at $2.79, or a valuation of about $416 million. Despite the decline, the average rating on the stock is overweight, according to FactSet. Allbirds has made several shifts in strategy over the past year. The most notable was a decision to begin selling its products through wholesale partnerships with retailers such as Dick’s Sporting Goods , Nordstrom and REI. “They’re facing a tough macro environment, but they seem committed to bringing margins up and narrowing losses next year, and we think the brand will benefit from the exposure created by high-quality wholesale distribution and growth of brick-and-mortar stores,” said Wedbush analyst Tom Nikic, in a research note earlier this month. “And with $180 million of net cash, we think they have adequate liquidity to get through the currently challenging macro environment.” Nikic conceded that unprofitable businesses aren’t very attractive to investors at the moment, but he said the “long-term risk/reward is skewed positively here.” Wong declined to speak about specific companies, but she anticipates that wholesale partnerships will become a bigger part of the strategy of companies that had their roots online. Many direct-to-consumer companies began to open stores as their brands matured. Storefronts gave the brands more exposure and allowed new customers to feel and see the product first hand. But stores are expensive, and some companies in the sector expanded too fast. That may have put the brands in locations that were less desirable. Wong said e-commerce companies can’t miss out on being in brick-and-mortar stores, because that’s where a bulk of the sales still occur. However, wholesale partnerships accomplish some of what stores did — increase exposure — with less risk. In an interview with CNBC’s “Squawk Box,” Warby Parker talked about its plans to continue opening stores in the coming year. In 2022, it opened 40 stores. Although the company began online, 90% of Americans still buy their glasses in stores, according to the company. Co-founder and co-CEO Neil Blumenthal said its stores pay back their costs within 20 months and have “a four-wall EBITDA of 35-plus percent.” Warby Parker shares are down 63% since the start of the year. Blumenthal attributed the decline to sentiment about the group, but said the company is growing faster than other optical peers. “I think [investors] should expect a continued commitment to sustainable growth and what we mean by that is sort of aggressive, ambitious growth coupled with expanding profitability,” he said. Piper Sandler considers Warby to be one of its favorite names in the digital disruptor space, with a price target of $22.00, or 28% upside from its close on Wednesday. “While macro pressures may intensify, we do think that WRBY will be more resilient than more discretionary items,” said Edward Yruma, the analyst who covers the stock at Piper, in a research note. A strong Christmas could boost this stock Jake Dollarhide, co-founder and CEO of Longbow Asset Management, said he counts Amazon and Chewy among his top 10 holdings. “The Amazon story is much, much more than retail,” he said, citing the strength of its AWS business, Prime and the stock’s valuation as reasons supporting his investment. However, in the wake of the company’s weak fourth-quarter forecast in October, expectations have been reset. “They’ve lowered expectations so I think any upside surprise they might have — a strong Christmas season — can be really beneficial for the stock,” Dollarhide said. Amazon shares are down about 43.5% year to date. The average price target for the stock is $135.94, which implies a 44% gain from Wednesday’s close. Dollarhide’s interest in Chewy is a bet on high-income consumers’ spending power and the convenience of the online pet supplies retailer’s subscription model, he said. He expects Chewy’s subscription service, which delivers food, medicine and other pet supplies, at regular intervals, will help it protect its market share against rivals such as Petco . “Anybody who really loves their pet is willing to spend pretty much anything on their pet ,” he said. “… To me, the three recession-proof categories have always been booze, coffee and pets.” Chewy shares have fallen 29.2% so far this year, but Petco’s value has been cut in half. Chewy has an average rating of overweight and a target price of $43.71, according to FactSet. Chewy shares closed Wednesday at $41.76. Also, it’s worth noting that many direct-to-consumer brands are targeted to more affluent consumers, who should still have money to spend on holiday gifts, even if they are being more careful with their purchases. “The consumer stayed home for a year or two, bought a ton of product — and in every category — and now she’s spending on services and experiences, restaurants and travel. I think the competition for wallet share is fierce,” Wong said.
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