This is a copy of an investment letter from Steve Harmon that I lifted from Raging Bull. FLWS is listed with some very good companies in two big holiday sales areas.
Sign up at e-harmon.com
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All year long the Internet etail stock group has been acting like Santa
Claus at Club Med, slightly out of place lounging by the pool of
Internet
stock liquidity watching the splash and unable to swim. The important
thing
now that the holiday season begins to be thought about is that 35% to
50%
of a retailer or etailer's revenue comes in the fourth quarter.
Last November I wrote a seminal piece on etail and how the holiday
season
may affect the group, which sent the group soaring. This year I urge
caution for the sector since not all etailers are created equal, gross
and
net margins matter more than ever. Increasingly the sector relies on
scale
to make up for net margins that are very thin or non-existent. Brands
rule.
Hurting most of the group has been huge marketing costs as they
compete to
build brand recognition. Increasingly I see that more well known
brands in
the highly-competitive space may start to consolidate products since
adding
another product is easy but building a brand in a sea of etail dot.coms
popping up daily is difficult.
That's why the more consumer-oriented firms like AOL, Amazon,
eToys, Yahoo
could emerge as holiday stars over time, despite teh fact that AOL and
Yahoo have no thought of themselves as etailers. But they do lease
space to
etailers and chalk up a win in that regard.
Let's gert a snapshot of some of the etailers out there--
The 1999 E-TAIL Holiday WatchList:
Software
Beyond.com (NASDAQ:BYND), Egghead (NASDAQ:EGGS), Digital
River
(NASDAQ:DRIV)
Books
Amazon.com (NASDAQ:AMZN), barnesandnoble.com
(NASDAQ:BNBN), Borders
(NYSE:BGP)
PCs
Dell (NASDAQ:DELL), ONSALE (NASDAQ:ONSL), Egghead
(NASDAQ:EGGS), Gateway
(NYSE:G)
Music
CDnow (NASDAQ:CDNW), Amazon (NASDAQ:AMZN)
Gifts
AOL (NYSE:AOL), Amazon, 1-800-Flowers (NASDAQ:FLWS)
Travel
Preview Travel (NASDAQ:PTVL), priceline.com (NASDAQ:PCLN)
Clothing
AOL, iTurf (NASDAQ:TURF)
Electronics
ONSALE, CNET (NASDAQ:CNET)
Food
AOL, Peapod (NASDAQ:PPOD), 1-800-Flowers
Now this year the shoppingscape looks a little longer with more
choices,
some of which could enjoy a seasonal hop as gift buyers come to realize
that the site they're buying from is also a public company.
While last year's etail party was what I would call the "First Etail
Christmas" this year the Internet and shopping have become almost
something
taken for granted. That benefits revenue results and I expect sales to
be
double what they were last year for the top sellers in major categories.
Also, for 1999 the customer and trust levels have grown exponentially.
e-harmon.com estimates that perhaps 25 million customers may buy a
holiday
gift via the Web this year (out of a global Internet user base of 150
million). In dollars we estimate $7 billion globally sold in fourth
quarter.
Specifically, consumers in the U.S. (with Web usage at 25% to 30%
of
households) no longer debate the security issues about using credit
cards
on to buy on the Internet. Convenience also is now taken for granted.
Cheap
delivery, fast, doorstep, no holiday crowds to compete with. Price points
compete and beat the mall.
Also, a key shift to more women (about 50%) and children (about
15%) of
Internet users brings to play a more shopping-centric demand for
1999 since
a majority of all retail buys from groceries to clothing are made by
women,
driven by guess? their kids who want, want, want.
We use Amazon as the ultimate proxy for etail: key difference this
year is
Amazon's emergence as a broader etailer rather than just books.
People may
forget but just a couple years ago Amazon only had $15 million in
annual
sales. First six months of 1999 it posted $608 million, easily outpacing
any other seller on the Web.
In the above list we expect Amazon, eToys (the first newbie to the group
for 1999 holiday), eBay, AOL, to lead the pack given their girth and
branding.
But on what we dub the "under-discovered" list we keep an eye on
iTurf
(NASDAQ:TURF) due to its Delia's Website that's a popular apparel
buying
spot for teenage girls. On a pure market cap to annualized revenue
multiple
we believe Onsale (NASDAQ:ONSL) looks somewhat attractive.
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e-harmon.com's Ho-Ho-Holiday
Company Ticker Mkt cap Rev multiple
eToys ETYS $ 7,568 237.2
eBay EBAY $ 17,878 96.8
Priceline PCLN $ 9,184 28.5
Amazon AMZN $ 27,229 22.4
iTurf TURF $ 190 16.9
CDNow CDNW $ 358 3.1
Onsale ONSL $ 277 0.9
all $ in millions, as of Sept 29
____________________________________________
At under 1x revenue Onsale may have some room. On another level
CDNow
(NASDAQ:CDNW) has been largely ignored as Amazon has eaten into
music sales
on the Net. However, at 3x revenue and a pending merger with leading
direct
music seller via mail Columbia House CDNW may be back on the
charts soon.
eBay may emerge as more than a flea market. Increasingly it is
becoming a
etail platform as small businesses set up auctions on it, leveraging its
3
million regular users into a buying engine. eToys high multiple owes
to its
market-leading edge as the toy-tailer of record as its competition lags.
At
237x though we caution investors to not get carried away on too much
expectation.
For indeed, the entire group had a huge run last year on seasonal good
cheer. But from first quarter until now the etail sector, except Amazon
anyway, has been in a post-holiday funk that only now it starts to break
out from.
For despite barely being into Fall I think the market's looking closer
at
etail since it hasn't been a 1999 party so far.
Tis almost the season to be jolly but not folly. |
