“If you want to succeed in retail, you need to fully commit to off-price or online,”-Jim Cramer, Mad Money, March 5, 2020
Retailers have been struggling for sometime to compete with the giant Big-box stores such as Amazon, Walmart, Home Depot, and Costco, who offer massive discounts, great selection, and an easy shopping experience. Then the Coronavirus pandemic engulfed America this past March, and most retailers, other than essential ones like pharmacies and grocery stores, were forced to close their doors because consumers were self quarantined. After that took place, retailers needed to make changes to their stores to allow for proper social distancing and hygiene so they could open them safely. Brand loyalty gave way to buying whatever was cheapest. Some retailers, including Hertz JC Penney, Neiman Marcus and Brooks Brothers have already succumbed to the virus and have filed for bankruptcy. Others have laid off employees and are looking for potential buyers.
When I looked at the whole retail landscape, I put together some thoughts as to how things were going to play out. One was that no one was going to be working out at fitness clubs for some time; they would be too hard to sanitize and people would find ways to workout at home via a home gym, a DVD, or a YouTube video. Another thought I had was how were department stores going to keep the lights on as so many of them were mall based and everybody was at home and could buy these goods online for less. Finally I believed that beauty supply retailers were going to suffer, because women weren’t leaving their house for socializing or to work, and when they went to essential stores they were wearing masks. Surprisingly to me, I was wrong. Planet Fitness(PLNT), Ulta Beauty(ULTA) and Kohl’s(KSS) all figured out a way to stay relevant and strategically change their business models after taking a massive hit when the pandemic struck. These changes are having a positive impact on how they now do business, and once the pandemic has ended, they will emerge as stronger companies than they were pre-coronavirus. Here are their stories of revival.
If they can’t come to you, then you go to them.
Planet Fitness has taken a big hit this year due to the pandemic. Their stock is currently at 58.81. They hit their 10-year high of 88.77 on February 19, 2020 and their 52-week low of 23.77 just under a month later at 23.77 on March 18, 2020. This just shows you where their stock could return to once COVID-19 becomes under control. YTD Planet Fitness is down 21,25%, but over the past 3 months it is actually up 3.96%. What sticks out is that not only are Planet Fitness’s earnings expected to grow well annually(38.5% per year), but so are their revenues as well(20.1%). Finally, the company’s earnings have grown by a whopping 43.9% per year over the past five years. Unlike Gold’s Gym, who filed for bankruptcy on May 5, I can’t help myself to see a bright future for Planet Fitness after looking at these numbers once COVID-19 is all behind us. And this is why…
Planet Fitness has rebounded from the pandemic by giving its members a great workout experience in the comfort of their own home. Not only have they allowed members to cancel their memberships for free, but they also have the industry low cost for people who want to become members as well. But for members who wanted to workout while staying at home, and those who preferred doing it after the stay at home orders were lifted, Planet Fitness boasted a vast library of fitness content from company trainers on its app as well as on YouTube. They also offered live streaming classes with instructors on Facebook as well. Stay at home orders led to a 250% spike in app usage for the company, similar to the enhanced user traffic for competitors such as Peloton. The company also put a lot of money into the sanitation and safety of their gyms when they opened, boosting their member’s confidence towards working out in them once they opened. I didn’t take into account when looking at fitness clubs and the virus was how accessible a fitness club would be. Planet Fitness provided a rapid response, and all types of people craved exercise to reduce stress, stay active and feel good.
Also, Planet Fitness only directly owns only 5% of its locations. Franchisees pay for most of the other gyms. So while they have over 2000 locations, CEO Chris Rondeau would like to build out another 2000 long-term. With businesses shutting down and office space opening up, the virus may actually speed up his plan.
Beauty is not what’s on the outside, but what’s on the inside.
Ulta Beauty’s numbers are drastically down, another retailer victim of the virus. But they’ve done a makeover, and what I didn’t understand about how their business model would survive during the Coronavirus. I completely get it now.
Currently Ulta Beauty stock price is 203.00. They hit their 10-year high of 368.83 on July 17, 2019, and their 52-week low of 124.05 on March 18, 2020. YTD Ulta Beauty Inc. is down 19.81%, but for the past 3 months they dip only 5.80%. We have another company whose earnings are expected to grow immensely(53.3% per year) along with decent revenue growth(12.1% per year) expected. Finally, when looking at company numbers, their earnings have grown 17.7% per year over the previous five years. Another company I see thriving once the virus is under wraps. And here’s where I got it wrong…
Ulta Beauty made a couple of key adjustments during COVID-19. One was developing curbside pickup. Because women who shop at Ulta Beauty know their products, know their selection, and have been using the same beauty products for years. One thing I learned about their business was how loyal their customers are to them. Certain beauticians have been working with them on a personal level for years, and the same goes for the salon department. Their customer care is phenomenal. And this will keep women shopping with them rather than finding another supplier online.
Ulta’s Beauty’s e-commerce has taken off. They’re up 100%. Through technology, you can take a photo of yourself, use their app to add different lip gloss or eye shadow to it, and the next thing you know a customer is buying new products. Ulta Beauty also has a unique Ultamate Rewards Program that provides customers with a more personalized experience through the use of AI and analytics.
Another thing I didn’t factor in when looking at Ulta Beauty was the boom of Zoom. Women want and need to look good when they are on camera. I get that now. The truth is that beauty makes people feel better, allows for stress-release, and provides the opportunity for people to take part in self-care and self-expression. Finally, Ulta Beauty’s diversified business model of many brands, salon services, and locations within local communities ought to position it to come out ahead post-pandemic.
Expect Great Things.
The Coronavirus Pandemic hit Kohl’s hard, when they decided to close all 1,110 of its stores on March 19 and didn’t re-open them until May 8. Kohl’s stock is currently at 22.15. Kohl’s 52-week high was 59.28 on November 15, 2019, while its 10-year low was 10.89 on April 3, 2020. YTD, Kohl’s has taken a massive hit, down 56.74%. But over the past 3 months, Kohl’s has rebounded nicely, and is actually up 19.26%. One nice thing about an investment in Kohl’s right now is that it’s a value buy. It’s earnings are also expected to grow tremendously, at a rate of of 101.2% per year. One thing that differentiates themselves from most other apparel retailers who are failing is that it’s debt is well covered by it’s operating cash flow, which gives investor’s confidence that Kohl’s won’t be shutting their doors anytime soon.
I am surprised to see a store like Kohl’s back on its feet and growing. I envisioned with so many jobs lost, that people wouldn’t be shopping for new clothes, new bedding, new kitchenware, etc. I envisioned people just using their disposable income on bare essentials such as food, medicine and gas. But I was wrong.
Outside of auto sales and gas, retail rose a robust 6.7% in June, including more than doubling at apparel stores. I failed to take into account certain things, such as the 2 trillion dollar stimulus package, the desire to look good in front of the camera, electronics people would need to work, use for school, and to entertain themselves. Finally, I didn’t take into account the importance of having a comfortable home that you’d be spending so much time in.
So how has Kohl’s climbed out of the rubble and forged ahead while so many other retailers remain on life support? For one thing, they, like Ulta Beauty, are free standing brick and mortar stores. This plays in their favor, unlike Macy’s and Neiman Marcus, which are mostly connected to malls. And while many department stores and other apparel retailers have either declared bankruptcy or are in dire straits, Kohl’s will emerge with a larger customer base because of it.
What Kohl’s has done by teaming up with Amazon to accept their returns and bringing foot traffic into their stores is brilliant. 80% of Amazon customers live within 15 miles of a Kohl’s store. Kohl’s is also leasing space to Planet Fitness (where their push towards athletic apparel should pay off nicely) and Aldi, plus teaming up with in-store Weight Watcher consultants, further emphasizes a visit to its stores that they wouldn’t have seen otherwise.
Kohl’s has seen an uptick in online sales, with an increase in May of 90%. While the company already boasted a strong presence online before COVID-19, with 24% of its sales coming from there in 2019, this will most likely see an uptick once 2020 is in the books. Furthermore, Kohl’s has always been an off-price shopping store, with great deals offered via their charge cards and coupons. This will help them compete with the Big-box stores when it comes to the more price conscious consumers we see today. Finally, Kohl’s has included a commitment to the in-store shopping experience, and these are all reasons for seeing the company coming out of the virus stronger than it was before it.
The Best is yet to come
The Coronavirus took a massive hit on our economy, and the retail sector took a beating, including the 3 retailers I highlighted in this article. But Planet Fitness, Ulta Beauty, and Kohl’s were either more prepared for the virus when it struck, developed new strategies to help pull themselves up and become profitable again, or had the secret sauce that so many other retailers lacked. What you need to know is that once the virus is contained and our economy makes a strong recovery, these companies will be stronger than they were pre-coronavirus due to how they added on to their business model, and I would expect their stocks to see a steady rise upward. Planet Fitness, Ulta Beauty and Kohl’s can still be considered value stocks if you take into account where they’ve dropped to YTD. You may want to wait until you see what happens to the stock market as COVID-19 continues to surge forward again, because you very well might be able to pick these off at a much cheaper price if the stock market turns for the worse again. But when you see that opportunity come, I wouldn’t hesitate to buy into these 3 retailers. I can’t help but see a ton of long-term growth for all of them over time.
*Numerical Analysis sourced via SimplyWallSt and CNBC.