The Disruptive Millionaire-Maker

Let’s get this out of the way right now: The one stock Amazon can’t crush is At Home (NASDAQ:HOME).

I’ll tell you everything you need to know about it in just a moment, first…To understand how HOME can fight Amazon and win, you need to understand the retail industry’s current state…

Category by category, mall by mall, the threat is real. Online competitors have driven chain bookstores, electronics dealers and record stores to extinction and keep tightening the pressure on everyone else from the neighborhood supermarket to upscale housewares boutiques. And a lot of malls shut down for the pandemic.

But Wall Street already wrote the mall off . . . a decade ago. And all the highly compensated people who run brick-and-mortar retail chains have had years to pivot their store concepts and merchandise mix to get out from under Amazon’s lethal shadow.

It keeps the malls alive, making investors a surprising amount of money on what should on the surface be a dying sector. The core principles are clear:

1. There are relative winners and losers here as much as there are anywhere else in the economy. Some chains took on too much debt and bought too much real estate and now they’re choking on their own balance sheets. Others have kept up with Amazon a lot better than their stock prices sometimes suggest.

2. People are still buying stuff. Amazon only captures a fraction of all new retail sales. Track the rest of that money to the stores that are ringing the cash register and you’ll find a surprising amount of growth.

3. Disruption happens here. The brick-and-mortar retail business can be as innovative as anything coming out of Silicon Valley or Wall Street. The only difference is that instead of playing out inside computer screens, the hot new ideas happen on store shelves and in money-making consumer experiences.

People who spend all day in front of a screen sometimes forget what’s going on in the real economy. Admittedly, electronic commerce remains the most dynamic slice of the retail universe and an investor who wants pure exposure really only has four options.You can go with Amazon, the giant that now dominates half of the online market and is still growing its presence a healthy 15% a year.

Online-focused contrarians can pursue niches with eBay (NASDAQ:EBAY) or the much smaller Etsy (NASDAQ:ETSY), Wayfair (NYSE:W) and (NASDAQ:OSTK). Between them, these stocks maybe control 9% of digital retail.

The third option is to skip the stores entirely and focus on the technology companies that build the online shopping carts and support the credit card transactions. That’s PayPal (NASDAQ:PYPL) and upstart Shopify (NYSE:SHOP).

Or you can go back to conventional brick-and-mortar or, more realistically, unified storeand-screen platforms that beckon every shopper offline and online, wherever the urge strikes and the opportunity is there. When a retailer finds the keys to survival and success,it doesn’t matter where the final sale gets booked or whether the merchandise is shipped or carried off in a shopping bag. Growth is growth. And when the chain is small and growing fast enough, shareholders can make dot-com levels of money.

Either way, the obvious choice isn’t really a pure play on retail any more. Amazon is increasingly about cloud-computing services and even its commercial operations are less about selling its own inventory than creating a marketplace for entrepreneurial third parties to exploit. A full 65% of all retail dollars on the Amazon platform and 85% of the company’s growth came from these third parties last year. Direct sales already are a small piece of the overall footprint and getting smaller every day.

Meanwhile, conventional brick-and-mortar stores remain the center of the consumer universe, generating 16 times as much economic activity as Amazon last year. Walmart (NYSE:WMT) still dominates that world, but it doesn’t even account for 10% of that admittedly fragmented landscape.

Wall Street, Main Street, Electronic Street

What’s striking is that Amazon is so popular on Wall Street and so richly valued that it distorts the market’s view of where retail dollars really go.

Amazon generates just as much profit as Walmart, which now has reached a phase where it takes a vast amount of growth to move the fundamental needle. As a result, WMT has barely 25% of the Wall Street footprint as its electronic archrival.

It doesn’t have to make sense. Amazon simply rates a huge premium as the categorykilling company that terrifies a lot of investors. Walmart, on the other hand, is seen as friendly, reliable and boring: the status quo that disruptors are eager to divide and conquer.For me, however, even that battle of the giants misses the real story and the real opportunity in retail today. Amazon and Walmart between them are barely 15% of all U.S. retail.

There’s easily $4.5 trillion a year left for everyone else to fight over. Even at miserable 2% margins, that’s $90 billion a year in theoretical profit for the industry to divide. Companies capturing part of that market from rivals will grow faster and deserve valuations closer to Amazon. The rest compare more closely to Walmart.Wall Street doesn’t see a lot of the winners. A lot of public retail stocks are the entrenched department store chains and mall outlets that are truly vulnerable to more nimble competitors.

Look at a Wall Street list and you’d think all American consumers shop at Amazon, Home Depot (NYSE:HD) and Walmart exclusively, with a thin veneer of activity at Lowe’s (NYSE:LOW), Target (NYSE:TGT), TJX (NYSE:TJX) and Costco (NASDAQ:COST).

That’s it. No other retail stock rates even 3% of the big consumer portfolios, which are weighted by market capitalization and not market share. As a result, dozens of day-today retailers in modern American life get ignored. And only two of the companies I just mentioned — Amazon and Costco — are growing their sales 10% per year or more. The entrenched retail giants simply aren’t dynamic. And the truly dynamic chains are still too small to ping Wall Street’s screens. It’s no wonder the analysts look at the sector and simply see Amazon, already a giant and growing fast while all the other major players stall, stagnate or actively erode. (Remember Sears? Remember JCPenney?)

Whenever you’re looking at retail stocks, remember that Main Street needs to play the biggest role in your calculations. Follow the shoppers. Follow the money they spend. Wall Street can’t see the emergent trends hidden in Amazon’s shadow.

There are weak links in that food chain as well. The department stores are missing. The drugstores are missing. They’re out of favor on Wall Street, so they just don’t have the market heft to show up on the lists. Some people say they’re doomed. After hearing that story for years, I’m less and less convinced. They may not be growing fast as a group, but they aren’t giving up a lot of ground either. Amazon has to fight harder now.

Even the up-and-coming electronic upstarts get ignored. Some are a lot more vibrant than Amazon at this stage in their business cycle. If you want the thrill of buying Amazon at $20 back in 1997, this is the place to look. Buying Amazon here in 2021 isn’t a bad decision, but it won’t wind the clock back a single day. The future is with today’s dynamic sites and their offline counterparts.

Growth Spots in Retail: HOME and Beyond

As long as companies like Kohl’s (NYSE:KSS) keep trying to reinvent themselves by making overtures to buy upstarts like At Home (NASDAQ:HOME), the game isn’t over. HOME isn’t an online player at all. This isn’t like Walmart paying $3 billion (6X revenue) four years ago to absorb in order to make a credible challenge to Amazon online.

This is adding 180 specialized home furnishing stores — as brick-and-mortar as it gets — to the existing 1,100-store footprint. It’s an injection of more vibrant retail concepts, curated merchandise and sales culture into a tired old-school model.

On the surface, it’s barely enough to move the needle. Last year was the first one ever that HOME did more than $1.5 billion in sales. KSS still books 10X that much revenue across the chain, so simply bolting on the additional transactions isn’t really a strategic win. But unlike KSS, HOME is growing fast, boosting its sales 15% a year. Amazon is also expanding its share of the category 15% over the same time period. That’s right: HOME is disrupting its chosen market segment just as fast as the Jeff Bezos machine… and it’s doing it without relying too heavily on online sales to accelerate the process. That’s the kind of stock we love. Whether it gets acquired now or later, it’s going to make some forward-looking Old Retail executive very happy.

Who else is on my radar? Factoring out restaurants, U.S. retail activity expanded a spectacular 14% last year as the pandemic shook the landscape so the growth barrier has fallen. Any chain can get a taste of that sales explosion as long as it finds a way to disrupt shopping habits enough to steal share from slower competitors

Don’t be fooled by that low overall percentage benchmark. The consumer economy is so vast that even 3% in fresh sales across the entire landscape turns into nearly $200 billion for the winners to carve up. Granted, $94 billion shifted online but brick-and-mortar stores still got an extra $1 for every $1 that went to Amazon and its smaller counterparts. Share and share alike.

And the brick-and-mortar world is extremely fragmented. Even $200 million can make a huge difference for next-generation chains like HOME that are still trying capture just 1% of that growth, let alone appreciable share of the overall retail universe. Naturally it’s barely a rounding error for Walmart or Amazon, which need to grab $2 billion a year just to give Wall Street 1% of growth. But we aren’t looking at them right now.

Costco (NASDAQ:COST) barely makes the grade. It expanded its sales $14 billion last year for 9% growth. That’s nowhere near Amazon territory, but for entrenched brick and mortar it’s a great start. And 2.3% margins are actually fairly high in this world.

Lululemon (NASDAQ:LULU) is tiny but coming up fast. Its 21% sales growth last year only added up to $700 million… while hardly a dent in the giants’ profiles, it feels really good for shareholders. Next year I expect that growth rate to add up even faster.

Ulta Beauty (NASDAQ:ULTA) is right behind, adding $700 million to its cosmetic sales last year for a 10% growth rate last year. We’re getting close to Amazon territory now in terms of growth even if the numbers are nowhere near the same scale. That’s all right. We don’t want scale. We want dynamism.

Five Below (NASDAQ:FIVE) is worth mentioning. Again, tiny by Amazon standards.

Last year’s 18% growth spurt only translates into $300 million in real dollars. But its youth-oriented discount stores are beating Amazon on that level. This is where the real action is on Main Street, even if it’s starting small. Then there’s HOME. Similar story, with 15% growth for an extra $200 million on the top line. Dynamic, small, endless room to expand.

I could name a few other companies, niche-oriented brands where even $100 million moves the needle in a big way. But you get the idea. Size is irrelevant. Speed and sizzle are what matters. And there’s plenty of sizzle to go around.Figure Amazon captured 26% of all new retail dollars last year, Walmart got an anemic 2% share and Costco claimed 5% of the pool. Factor out the slow-growth names I’ve only alluded to in passing (looking at you, Walgreens) and there’s easily $100 billion left for the disruptors to capture.

That’s a boom. I’m willing to chase it down into some mighty small stocks until we’ve squeezed all the profit we can out of their business models. Are you?