🔎Do we have a bubble in premium brick-and-mortar?
Their stocks are soaring. But it's primarily multiple expansion, not positive business inflection. Some of them are extremely well managed. But they are also riding a macro wave that will end.
TLDR Summary
Since July 1, 2023, COST 0.00%↑ is up 93%. WMT 0.00%↑ is up 150%. ROST 0.00%↑ is up 103%. TJX 0.00%↑ is up 98%. CASY 0.00%↑ is up 207%. These companies run very simple, actually dull business models. They own physical locations where consumers can get their staples. Yet they have handily outperformed the S&P 500 which advanced ‘just’ 50% during that period. And they didn’t start this run from distressed valuations. Most of them had performed very well for years before.
This is not normal. Some of these stocks have charts like Biotech companies that found cancer cures. For the most part, their businesses haven’t even inflected positively. Many of them haven’t grown faster recently than before the pandemic. Margins haven’t expanded either. The majority of their share price performance is multiple expansion.
The change is mostly in value perception. The post-pandemic bull market has coincided with a dramatic value shift among B2C businesses. Successful brick-and-mortar retailers have captured value previously owned by large consumer brands. Value is not assigned anymore to those who give products their identity. It goes to those who actually deliver them to paying customers.
Well-managed brick-and-mortar retailers get that value because they are perceived as more defensive than other B2C businesses. They have also rerated due to their suitability as inflation hedges. They have great customer bargaining power, fast inventory turnover and their private labels win when consumers are hit by an unexpected inflation surge. Some of them have also demonstrated strong cash management with falling inventories in relation to their revenues which releases cash and boosts profits.
We are living in a K-shaped economy where many B2C businesses struggle to find willing and financially able customers. They need help from distributors. That’s why the ad businesses of Meta and Google work so well in the digital world. Retailers are doing well in the physical world for the same reason.
There is no bear case for Walmart and Costco. Everyone loves them. And that is in my opinion the bear case. There are tons of possible reasons why either their operating performance might disappoint in the future or why one shouldn’t pay more than 40x for their earnings. I have discussed five of those reasons in this article.
It’s November 2021.
Imagine you are the most average investor who always holds the deepest in-consensus opinion. We’re at the peak of the pandemic bull market. You observe that physical distribution channels are still aching from lockdowns and their aftermath. Online distribution rules. You believe it was anyway destined to conquer the economy. The pandemic just accelerated the process.
