3 Stocks Challenging Amazon's Online Retail Deathgrip

By StreetAuthority | Updated August 15, 2014 AAA

In the board rooms of Best Buy (NYSE:BBY), Barnes & Noble (NYSE:BKS), Bed, Bath & Beyond (Nasdaq:BBBY) and many other retailers, the same two concerns exist: Consumers aren’t spending.

Retail sales grew just 2.9% in the first six months of 2014, according to the National Retail Federation. And whatever sales growth that can be had is often sucked up by Amazon.com (Nasdaq:AMZN), which is expected to boost revenue $15 billion this year and another $20 billion in 2015 to nearly $110 billion in sales.

It's only once you realize that shares of Amazon.com are off 20% this year, that you begin to understand that every corner of the retail sector is hurting.

Many retailers now realize that they should have devoted more resources to their e-commerce portals. Bed, Bath & Beyond, for example, is just now taking its web presence seriously -- and that came only after its shares were pummeled. While some firms such as Walmart are spending hundreds of millions of dollars to internally boost their online sales platforms, others lack the money or skill to create a world-class website. And they are increasingly turning to young tech upstarts to help them expand their global online sales footprint.

Here’s a closer look:

1. Demandware (Nasdaq:DWRE)

This company is a one-stop shop for all things e-commerce: It can build websites, handle back-end transactions and develop a retailer's mobile presence -- an increasingly important platform. Though the company was founded only a decade ago (and went public in 2012), its business model has reached a clear inflection point. After boosting sales 30% in 2013, analysts expect sales to rise 40% in both 2014 and 2015. In 2015, sales are expected to exceed $200 million. Not bad for a company that had less than $40 million in sales in 2010.

Despite that rapid growth, the market's retrenchment from high-flying cloud-based stocks has left a dent on the stock chart above. Indeed shares fell sharply after Q2 earnings results, even as analysts generally applauded the quarter and outlook. But that sell-off appears to have been an over-reaction: “The company continues to grow the top line north of 45%, and with consistent execution, we think shares will bounce back,” wrote a Barclays analyst in a recent report.

As Demandware’s revenue base grows, its skill set is evolving in tandem. For example, the company once needed several months to help a new client establish a digital presence in Europe. Yet with stronger regional expertise, Demandware was able to build out sites for footwear and apparel retailer Timberland in Spain, The Netherlands and Italy in a fairly short time. “With our solution, customers were able to get to market faster than with the traditional on-premise or build-and-run solutions. "Speed to market is one benefit of our cloud platform,” said Demandware CEO Thomas Ebling in a recent conference call. The company now helps oversee more than 900 client sites, up from 667 in the middle of 2013. Considering the number of retailers that have yet to establish a strong international digital presence, the company’s runway for growth appears to be extended furthermore.

2. Borderfree (Nasdaq:BRDR)

I profiled this company when I looked at recent IPOs. As I noted then, "Borderfree helps online retailers conduct global transactions, handling customer care, risk management, localized website customization and other services for clients such as Neiman-Marcus, Visa (NYSE:V) and others." The more I look at this business model, the more there is to like.

The clear appeal is global trade. As any economy develops, an appetite for U.S. goods starts to build. It happened in Japan and South Korea in the 1980’s and 1990’s, respectively, and in Russia and China more recently. In the years ahead, U.S. retailers are counting on rising demand for their goods in places like Kenya, Thailand, Peru and other emerging markets that are quickly developing a middle class.

By taking advantage of its own fixed network of shipping and logistics, Borderfree can offer very competitive shipping and fulfillment rates. When retailers go it alone, they find such costs can eat deep into their profit margins. Right now, the company is working to pass on savings to customers to boost the appeal of the service. In the second quarter of 2013, shipping costs equated to 12.9% of sales. A year later, that figure dropped to 10.7%.

3. Zulilly (NYSE:ZU)

This company has become a top player in the field of “flash sales” which are also known as “deal of the day” sales. Zullilly caters to mothers in search of clothes for themselves and for their kids. The catch: many of the brands on the site would have a hard time getting noticed in the crowded field of women and children’s apparel. For new and unproven brands, Zulilly has become an essential platform for exposure.

This company took its niche by storm: Sales hadn’t reached $150 million in 2011, but are now on pace for $1.2 billion this year. Still, investors may have gotten carried away and, at one point, assigned Zulilly a $10 billion valuation.

That was a bubble that needed to be pricked. Now the company needs to focus on sharp growth to justify its still-considerable $5 billion market value, and management will need to show that sales growth brings profit leverage. Zulilly generated a mere $27 million in EBITDA last year, but that figure is expected to exceed $100 million next year and approach $200 million by 2016. Merrill Lynch, which rates shares as neutral, sees a rebound from a recent $35 to their $46 price target, which anticipates a rather robust 52 times EBITDA multiple, based on 2015 forecasts.

Risks to Consider: These companies have likely already experienced their most torrid growth spurts. Though they should keep growing at a respectable clip, investors need to focus on their long-term results and not their 2015 targets, as they tend to look fairly pricey in that context.

Action to Take --> Even as retail sales appear to be stuck in low-growth-mode, online sales keep rising at a fast pace, as evidenced by these three firms. Their role as facilitator of other company’s internet sales platforms helps to insulate them against the fickle winds of fashion that any particular brand may produce. Investors have come to shun high-growth tech stocks in recent quarters, and the pullback in these three stocks enables a fresh entry point for investors that missed them before they surged.

Some stocks just don't fit the mold. And they are also the companies that can offer the biggest gains. My colleague Andy Obermeuller calls them "Game-Changing Stocks" and he's just released his latest report on the subject, "The Hottest Investment Opportunities For 2015." To find out which firms Andy considers to be the next market disrupters, click here.

]]>

You May Also Like

Related Analysis
  1. Stock Analysis

    Comcast Rolls Out 4K Ultra HD Content by Xfinity in UHD App - Analyst Blog

  2. Stock Analysis

    Are Amazon & Macmillan Making Peace with Multiyear Deal? - Analyst Blog

  3. Stock Analysis

    Amazon's 1-Hour Delivery Service Prime Now in Manhattan - Analyst Blog

  4. Chart Advisor

    Profit From Holiday Spending With This ETF

  5. Stock Analysis

    Visa's Sturdy Capital Signals Growth, Regulations a Risk - Analyst Blog

Trading Center