TGT/Retail - Another Step Towards 'Free Shipping'

Takeaway: There are a few key considerations as it relates to Target's rather bold move to go toe-to-toe with Amazon with free shipping.

 

1. First off...Historically, retailers in this space have been lemmings. Prior to TGT announcement (taking shipping threshold down from $50 to $25) there were 5 retailers in the space who set the free shipping threshold at $99 (JCP, M, TJX, BELK, Lord & Taylor) and 4 who sat at the $50 hurdle rate (TGT, WMT, Gap, Old Navy). TGT's move shifts the balance of power in the industry and we think that means there are more dominos to fall. 


2. Free Shipping is Inevitable. This is just the first market share grab by a big player which will inevitably lead to free shipping across the board. That's fine if you're a retailer who has a basket size big enough to absorb the incremental cost for both fulfillment and returns a la JWN. But the problem is that the TGT, WMT, JCP, and KSS do not have that luxury and it has profitability implications. Here's the math…

TGT/Retail - Another Step Towards 'Free Shipping'   - TGT   Shipping

 

3. If we assume that TGT online sales grow at a 23% CAGR through 2019, taking e-comm as a % of sales from 3.5% in 2013 to 12.5%, that equates to 20bps of gross margin pressure per year or $0.15 in earnings. To get there we assume that TGT dot.com sales come in at a gross margin rate 1000bps below brick and mortar sales. We've seen similar numbers out of KSS who you may argue is less efficient. But, when we pair that up with AMZN -- where shipping expense is 10% of total direct sales we think that's a fair estimate.

 

It's not likely that we will see any impact on profitability in the quarter the company will report tomorrow, because the data breach induced discounting in 2013 will more than offset the effect of free shipping. The same is true for 1Q and 2Q where the company invested heavily to drive traffic. But over a longer duration, you have a zero square foot growth retailer trading near peak multiples with cost pressures accelerating.

 

 

 


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more