Experiential retail, while not new, is starting to gain traction with consumers. Investors looking to make money from retail stocks ought to consider companies that understand the consumer’s desire for something more.
If you didn’t see the news, Pier 1 Imports (OTCMKTS:PIRRQ) filed for bankruptcy on Feb. 17. As part of the retailer’s plan to survive post-bankruptcy, it is closing up to 450 stores, including all of its Canadian locations.
Although you never like to see anyone lose their jobs, the writing had been on the wall for several years. The growth of Wayfair (NYSE:W) likely was the final nail in its coffin.
In hindsight, it’s easy to see how the retailer could have benefited from a business strategy that focused more on experience and less on stuff.
In 2020, a 200,000-square-foot complex will open called AREA15, which delivers a customer experience like no other.
“Consumers want immersive experiences and environments and that content must be carefully curated and ever-changing, blending one tenant experience with the next and presenting engaging ways to entice customers to share their experiences through social media,” stated AREA15 CEO Winston Fisher.
Some companies get experiential retail, and some don’t. These seven retail stocks get it. Pier 1 did not.
Retail Stocks to Buy: VF (VFC)
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It has not been an excellent start to the year for VF (NYSE:VFC), the holding company that owns Vans, The North Face, Timberland and several other well-known brands. VFC stock is down 16.3% year to date (total return) through Feb. 19.
How could a company that owns a hot growth brand like Vans be so far underwater so early in 2020? That’s a good question. The coronavirus, which caused the temporary closure of 60% of its stores in China, didn’t help.
However, not all is lost for the retail brand conglomerate. Vans, its skateboard-focused lifestyle brand, is killing it. In the first nine months of VF’s fiscal year, Vans sales grew 17% year over year, excluding currency. Part of the company’s Active segment, revenues should cross $5 billion for the year.
Vans has done an excellent job driving traffic to its stores.
As its VP Digital Technology, Matt Weber stated at the National Retail Federation’s Big Show in New York City, “Retailers have to do everything to make consumers want to come into the store when they no longer have to.”
In 2020 and beyond, look for VF to take this attitude at Vans and spread it around. Eventually, investors will catch up with the work it’s doing to jazz up the store experience.
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Retail Dive, who covers the retail industry quite effectively, recently highlighted five experiential store concepts to hit New York City. One of them happens to be Lululemon’s (NASDAQ:LULU) Flatiron flagship store, where consumers can get their leggings and pants customized while they wait. It goes on to discuss Hub Seventeen, the basement space that doubles as a coffee bar and yoga studio.
While I get the experiential aspects of the store, it was the Chicago opening last July of a 20,000-square-foot store that reflected the athletic brand’s commitment to the experiential.
Twenty thousand square feet in Lincoln Park doesn’t come cheap. Of course, when you’re as dialed in as LULU is — up 13.3% YTD and 78% over the past 52 weeks — bigger is usually better.
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The obvious choice from the department store crowd would have been Nordstrom (NYSE:JWN), whose NYC flagship store on West 57th is an experiential overload and the largest single-project investment in the retailer’s history.
Instead, I opted to go the contrarian route with Macy’s (NYSE:M), which is having a devil of a time rightsizing its massive real estate footprint.
The struggling retailer just opened the first Market by Macy’s in Texas. Only 20,000 square feet in size, it is a gathering of approximately 120 brands curated for the local Dallas-area bon vivant. It’s not meant to be a massive store where you can find everything under the sun.
Instead, it’s a store for experimentation and fun. No longer does it need to hit shoppers over the head with 150,000 square feet of space.
“Experimenting with different store formats allows retailers to identify the best size and location of stores for individual markets, and smaller footprints enable brand penetration in smaller markets that can’t support a large-format store,” said David Naumann, vice president of retail marketing at enVista. “We are seeing several brands expand into strip malls that offer the advantage of rents about one-half the cost of traditional malls and offer greater convenience for shoppers.”
Trading at 0.2 times sales, half the multiple for Nordstrom, this might seem like a Hail Mary. To me, it looks like a smart way to leverage the company’s 161-year history.
Experiential retail might be the stock’s savior.
Simon Property Group (SPG)
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I don’t think there’s any doubt when it comes to malls that Simon Property Group (NYSE:SPG) is the 100-pound gorilla of retail. Back in February 2018, I recommended the real estate investment trust’s stock despite the fact retail was looking less than healthy.
“Yes, I realize it’s one of the world’s largest mall owners, an area of the economy that struggled mightily in 2017, but things are looking better in retail and Simon’s up to the challenge of transforming the shopping experience to meet the modern consumer,” I wrote at the time.
Two years ago, it was yielding 5.1%. Today, that’s up to 6%. SPG stock has fallen in value as investors continue to debate the merits of owning retail real estate.
While I understand investor fears, Simon is doing everything in its power to remain relevant.
Case in point, the company recently announced a partnership with SBE Entertainment Group (operator of restaurants and hotels) and Accor (OTCMKTS:ACCYY), the people behind hotel brands such as Fairmont, Sofitel, Raffles and many others.
The partnership — to be called C3 — will develop 200 “ghost kitchens” by the end of 2021. Ghost kitchens, for those unfamiliar, are kitchens set up to make food for takeout and delivery only. There is no sitdown space.
Some of the locations will be at Simon malls. Others will be at Accor hotels, who own 50% of SBE Entertainment. The partnership plans to focus on delivery.
While it might seem strange to open a ghost kitchen in a mall, Simon wants to fill its retail footprint with the experiential. Customers who utilize the ghost kitchen’s services will tell others. This ultimately increases the foot traffic while filling vacant space.
The alternative: its space remains empty. Not a winning recipe.
Despite being down 10% over the past two years (not including dividends), I continue to like what Simon has been doing to protect its malls from irrelevance. Long-term, SPG’s a winner.
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Formerly known as Restoration Hardware, RH (NYSE:RH) caught the attention of investors last fall when it was revealed that Warren Buffett purchased 1.2 million shares of the furniture retailer in the third quarter. RH stock jumped by more than 7% on the news.
It turns out that Buffett is at it again. On Feb. 18, it was revealed that Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) added more than 500,000 shares of the retailer’s stock in the fourth quarter. The company now holds 1.7 million shares, good for a 9% ownership stake.
Not bad for a guy who said in 2018 that there were better stocks to own than retailers. I’m guessing he figured out RH gets the experiential trend.
Here’s an excellent quote from RH CEO Gary Friedman that explains the company’s focus:
“While most in our industry are closing or downsizing stores, we remain committed to our quest of revolutionizing physical retailing,” Gary Friedman, CEO, RH, wrote in a letter to shareholders in 2018. “The road of endless promotions, free shipping, and a shrinking store base is resulting in broken and unsustainable retail models. We prefer the road less traveled by, and like Robert Frost, believe it will make all the difference.”
If you live in Minneapolis, go to its RH Gallery, a three-level, 60,000-square-foot, experiential extravaganza that includes a rooftop patio. I think you’ll understand why Buffett is buying.
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Own a vacuum brand? Open a retail store. Own a cast-iron stove manufacturer? Open a retail store. Own a speaker brand? Open a retail store. Everyone, it seems, is going direct.
That’s what Sonos (NASDAQ:SONO) did in July 2016 in New York City’s SoHo neighborhood. The space is meant to recreate the various rooms in your house where you might go to listen to music. If you love music, the Sonos retail store is a must-visit if you’re in New York.
Why hasn’t it opened more stores? Probably because they’re darn expensive. Not every company has the deep pockets of Apple (NASDAQ:AAPL). Consider that Sonos made $71 million in its latest quarter on $562 million in sales. Sonos’ profit was less than Apple CEO Tim Cook’s 2017 bonus.
Why am I talking about a store that first opened in 2016? Because it continues to do retail the right way and that’s never going to go out of style.
“Some people view experiential retail as a cliche, but the Sonos store is innovative retailing in the sense that it has a very defined marketing segment (young adults), clarity in the promotion (gamification), and is located in a trendy part of New York City (Soho). In other words, a successful online strategy translated into offline,” stated retail expert Ronny Max in her January blog about experiential and concept stores in NYC.
Solidly profitable and cheap, SONO stock is an excellent buy at the moment.
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One of the other 52 locations on Ronny Max’s list is Walmart’s (NYSE:WMT) Intelligent Retail Lab (IRL) in Levittown, Long Island. Located within one of the retailer’s smaller Neighborhood Market locations, it’s the retail version of a petri dish, with experimentation being the name of the game.
“Each time our customers shop in this Walmart, we learn something new by using state-of-the-art hardware and software technologies, including artificial intelligence (AI). W plan to test a wide range of concepts we think will simplify the shopping experience and improve our stores,” states Walmart’s IRL website.
I’ve never been a fan of Walmart’s stores (WMT stock itself is a buy), but I think it would be interesting to visit this location to experience how the company tackles big-picture problems. Investors owning WMT stock more than a couple of years ought to visit the store — it’s open 18 hours a day, seven days a week — because it will give you a real understanding of what’s involved to make its stores a success.
While Walmart is struggling to make its e-commerce business profitable, initiatives like IRL will definitely help it get there faster.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
At the time of this writing, he did not hold a position in any of the aforementioned securities.
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