Over the weekend, turkey took a backseat to consumer spending with respect to the financial markets. According to ShopperTrak, total Black Friday sales dipped 1.8% year-over-year to $11.2 billion; however, online sales jumped 26% year-over-year to over $1 billion (ComScore). Due to the hyper-competiveness of the retail cohort during the holiday season, Black Friday (and Cyber Monday) has become more of an all-week promotional event. We expect online sales to continue be a driver of revenue expansion going forward, and we’ve identified a few names that we think will particularly benefit.
Visa/Mastercard
Although we prefer Visa (click ticker for report: ) from a valuation and brand strength perspective, it and Mastercard (click ticker for report: ) will be major beneficiaries of the move to online sales, in our view. Not only is e-commerce almost exclusively dominated by the credit-card network providers, but we’re seeing heavy promotional activity from issuers like JP Morgan Chase (click ticker for report: ) and Bank of America (click ticker for report: ) to spur payment volumes. Unlike in-store purchases which may be processed with cash, virtually the only way to pay online is via credit/debit card or PayPal (click ticker for report: ). We expect the providers to make continued payment share gains against cash throughout this holiday season.
We also think Visa and Mastercard will benefit from the housing recovery. Neither seems like an obvious play, but both could experience a strong tailwind from the improving segment. For one, stronger demand for appliances should bode well for the cohort because larger payments tend not to occur in cash for security reasons. Further, we expect a recovery in housing to lead to stronger consumer spending on an aggregate basis. We continue to hold Visa in the portfolio of our Best Ideas Newsletter.
eBay/PayPal
As we mentioned earlier, PayPal (a division of eBay) is one of the few options for consumers to pay for online goods, so we think the processor will benefit from the shift to online shopping. PayPal has also worked on gaining acceptance into traditional retailers, though we question whether it has been able to gain much momentum against the heavily entrenched competitors.
We think the shift to online retail also benefits eBay’s traditional business. The firm’s strategic shift in its marketplace operations to both fixed-price and auction items, as well as better fraud prevention measures have made the website a more attractive destination for consumers seeking holiday bargains. User growth has reached its highest levels since 2007, and we think the marketplace offers a better selection than in holiday’s past. Shares have been converging to our fair value estimate during the past year, and we think they still have further upside from current levels. We hold eBay in the portfolio of our Best Ideas Newsletter.
Macy’s
One of the nation’s largest department stores may not seem like an obvious winner, but Macy’s (click ticker for report: ) online execution has been second-to-none. The company has focused on delivering a value-oriented online shopping experience with defined thresholds for free shipping, as well as strong targeted marketing. Online sales jumped over 40% in the third quarter, and we think the retailer will report one of the strongest online results of any retailer. Still, we believe shares are fairly valued at current levels.
Dick’s Sporting Goods
After a surprise 47% surge in online sales during the third quarter, we’ve been closely monitoring actions at Dick’s Sporting Goods (click ticker for report: ). We like the company’s customer-engagement strategy, which avoids the major pitfalls of the “spam-like” customer contact we’ve seen other retailers suffer from. DSG is nicely insulated from Amazon (click ticker for report: ) due to its exclusive products and brand relationships, so we expect margins will continue to be strong in the fourth quarter. Shares score just a 6 on the Valuentum Buying Index (our stock-selection methodology), so we aren’t interested in a position at this time.