It’s been a tough year for retailers. Jim Gillies, Lead Advisor, Motley Fool Pro Canada, talks to Kim Parlee about the deteriorating retail landscape and whether we are seeing the end of traditional retailers.
Let's take a look at a list of the store closures on some US retailers this year. It's somewhat astounding-- 252 stores at Sears and Kmart, 1,000 at RadioShack, over 100 at Michael Kors. You can go through the list here. And everybody is closing stores right now, which begs the question, are we seeing the end of traditional brick-and-mortar retail?
Here to talk about the retail landscape, we have with us Jim Gillies. He's the lead portfolio advisor for Motley Fool Pro Canada. And it's nice to have you here.
Thanks for having me here.
Welcome. It's a pleasure. I want to start with-- those numbers are pretty devastating, quite frankly--
--the number of store closures. So is it over? Is traditional brick-and-mortar done?
What was interesting to me is there's been a report come out from Kleiner Perkins, which is Mary Meeker's new gig. And they have predicted for this year, 2017, 7,000 closures across the US. That is the highest number in the last 22 years. It's higher than the Great Recession.
So the bleeding is certainly not over. And what we have now is basically, we have people who can switch. They don't want to go in the stores. They don't want to go to the malls, don't want to go to the big boxes. And you can essentially switch storefronts with a swipe on your phone.
So I don't like what this company has done or I had a bad experience previously. I can move over here. There's very little brand loyalty. And so you have to really use data in new and interesting ways to try to connect with your customers so they'll be repeat customers for you.
Our fickleness has been enabled by technology, which I know because I do it. So let's talk about some of the names out there that are interesting that you've talked about on Motley Fool. Amazon--
The single greatest culprit of what's happened with retail.
Yeah. Let me ask you, what's interesting about Amazon? And then what are some of the risks with Amazon? I'm going to say profit. But anyway, keep on going.
Sure. The biggest interesting thing about Amazon right now to me is while all-- you have this other retail carnage going on, here's Amazon opening retail stores.
They're opening bookstores. They're experimenting with grocery stores. They've got campus bookstores-- not many. And they're certainly not what is going to drive the bus for Amazon going forward. That's not the pathway to profit for them.
But it's a new kind of store, isn't it?
It is. And it's almost like they are testing concepts for things like automation. So your grocery stores-- you'll just go and you'll pick what you want. Drop it in your basket. Walk out. Your Amazon account's billed.
You've got bookstores that are probably more of a showcase for gadgets. And the books are facing you on the shelf rather than being turned sideways. So they don't care if it's taking up more room. It doesn't matter to Amazon.
The campus bookstores-- you're a student. You're a campus bookstore. Everything comes there. You can get a Prime membership for half price. So now you're hooked into the ecosystem for the next 40, 50 years maybe.
And that to me is really interesting-- that now that Amazon has kind of laid waste to everyone else, now they're going to use that as another pathway to drive their advantage.
What's the downside or what's the risk with Amazon? And I kind of tongue-in-cheek say they have for a few quarters made a profit. But people are so fixated on the revenue growth. Is that going to come to an end at some point?
I almost think that they are a limitless revenue because what can’t they sell? This goes back to late '90s, when-- oh, it's an online bookstore. What if they sell something more? And of course, now today, there's something more.
So certainly, the valuation is a big risk. Jeff Bezos dying of a heart attack would be a big risk. Please. He's a very fit guy. But at some point, he'll wander off into the sunset. We hope that's several decades out, of course.
They are, at this point in time-- and you always want to knock wood when you say this-- they're kind of master of their domain. And they're the big fish.
Let me ask you-- there's a few other names I want to get through, if we can.
Home Depot-- the exception to brick-and-mortar because I guess they help build our personal brick-and-mortar.
Sure. Well, Home Depot's got a lot of advantages that aren't easily overcome like some of the other people who Amazon has taken out. So first of all, they're kind of a duopoly with Lowe's. I think those two companies together-- 80%, 85% of the market. So they have tremendous advantages of scale, of buying, of sourcing, and what have you.
The other thing is, too-- is that you got an Amazon Prime membership for your $99 a year, unlimited free shipping. They probably don't want to ship you too much dry wall or tiles or hardwood floor. They're quite happy for you to arrange that. So that's very difficult to get around. It's just not cost-effective.
The other thing is, of course, if you're doing something on your home, you need a tool now. You're probably not going to mess around online and look for various things. I'm going to go to Home Depot.
It's an hour, not a day or two.
It's done. But even Home Depot-- they're at the top end of the growth curve. They're not building a lot of stores anymore-- very slow. But the nice thing about Home Depot is the stores they have are tremendous cash gushers.
And the management they have have been using that cash in the service of shareholders. So they've bought back 30% of their stock since 2009. They paid a dividend that's growing like crazy. They just raised it 29% year-over-year. And that's after a series of four or five other annual increases.
So it's been a really great story. And management-- they're compressing their working capital and some taxable cash there, improving their margins. It's premium price. It's about 13 times EBITDA, 23 times earnings. It's not cheap, but premium valuation for, arguably, a premium company.
Let me ask. There's one name I want to get in here. And I've got about a minute left here. But Shopify-- Canadian company. There's not many Canadian retail-- they're not a retailer. Of course, they power retailers. That's part of what they do.
But if I'm not mistaken, you were-- Motley Fool was saying this looks pretty interesting at $35.50. And it's a bit beyond that now.
I think it closed today about $130.
$131. So I have my members into it about $35 and about $55, I think. It's really interesting because it's enabling small and mid-sized businesses to essentially build an online business and control it, essentially, from a smartphone. And so you have your business. You focus on it. And Shopify essentially powers everything behind it for you.
In 15 seconds, what are the risks of Shopify? Is it its valuation?
Its valuation-- number one, two, and three. But we like buying in thirds. So we'll maybe take a little tiny little cut just to get some skin in the game, and then add opportunistically as prices present themselves.
Jim, great having you here.
Will you come back?
Awesome. Great. Jim Gillies-- he's lead portfolio advisor with Motley Fool.