"Clicks-and-mortar" retailers will perform better long term, but as far as this holiday shopping season goes, investors predict online retailers will win the day.
Despite all of the hoopla surrounding "e-tailers," analysts and portfolio managers interviewed said companies that have both physical stores in which to shop and online selling sites eventually will perform better and their stocks will be rewarded.
Angela Auchey, an analyst with Federated Investors Inc., Pittsburgh, believes all of the talk about strong Internet sales -- even though they will not be a very large part of total holiday sales -- will hurt the stocks of the bricks-and-mortar retailers because of the psychological effect.
"We have been underweight the retail stocks. Now we're more concerned about market sentiment and the psychological effect of Internet sales, than the sales of the bricks-and-mortar stores," she said.
Ms. Auchey said retail stocks often don't perform well during the Christmas selling season, but usually bounce back early the next year. This year she thinks they might be slow to bounce back because of concerns about online retailers.
Federated owns 689,000 shares of The Home Depot Inc., which has an Internet site, 8,000 shares of Barnes & Noble Inc., which has its BarnesandNoble.com Web site, and 4,000 shares of Amazon.com Inc.
Said Dan Kapus, a portfolio manager with Banc One Investment Advisers, Columbus, Ohio: "This will be the season to watch for the performance of the `e-tailers' vs. the bricks-and-mortar retailers."
He believes some traditional retailers with good Internet sites will do well: Victoria's Secret, owned by Intimate Brands Inc.; Tiffany & Co., the New York-based jeweler; and Consolidated Stores Corp., which owns KayBee Toy stores.
Bank One Corp., parent of Banc One Investment Advisers, owns 60,000 shares of Intimate Brands; 71,000 shares of Consolidated Stores and 94,000 shares of Tiffany.
Mr. Kapus said building a Web site on which to generate sales "is much easier than building a distribution system," which the traditional retailers -- and catalog retailers -- already have.
Indeed, he expects catalog companies, led by Lands' End Inc., to perform very well because they already have in place the same types of distribution systems the e-tailers need.
Marian Pardo, a portfolio manager with J.P. Morgan Investment Management Inc., New York, agrees that catalog retailers with both stores and Web sites to strengthen their brand names should do well. She mentions Talbot's Inc. and Williams-Sonoma Inc. as two firms that began as catalog companies and should do well combining catalog, store and online sales. J.P. Morgan Investment Management owns 282,000 shares of Talbot's and 147,000 shares of Williams-Sonoma.
"Clicks and mortar, a dual-prong strategy" may work best, said Tim Fogerty, an analyst with ING Barings, New York. "Retail stores provide advertising for the Web site and they can do well together. The Internet is an important component of retailing, but some people like shopping the old-fashioned way."
Staples Inc. is "still an excellent company and will benefit from the online site."
Pricing pressure
Although he basically agrees that retailers with both stores and online presences will perform better, Donald Trott of Brown Brothers Harriman, New York, thinks retailers selling "commodity-type items like books and toys" will have a harder time because "the pricing structure is at the mercy of online retailers."
Online retailers like Amazon.com and eToys Inc. can sell products more cheaply than store-based retailers and will put more pressure on traditional retailers over the near term, he said. Stores with online sites such as Victoria's Secret, which have more unique products, will not be hurt as much, Mr. Trott said.
"A number of bricks-and-mortar retailers with online efforts are not being rewarded for their online efforts," said Elizabeth Armstrong, an analyst with INVESCO Inc., New York.
Retailers such as Federated Stores Inc. (which owns Bloomingdale's and Macy's), Staples and The Gap Inc. "are not seeing much in their stocks for their Internet efforts," she said.
INVESCO owns 621,000 shares of Federated, 1.1 million shares of The Gap and 1.2 million shares of Staples, as well as 30,000 shares of barnesandnoble.com LLC and 10,000 shares of eToys.
"About one-third of the products bought through catalogs or online get returned," she said. "If you have a bricks-and-mortar presence, it makes returns easier. That's an advantage the Internet companies don't have."
However, she said, one disadvantage the store retailers have is pricing. "If (a company) is protecting a store price and an Internet company is underpricing them," it could cause problems for the retailer, she said.
Cross-ventures
"Consumers are demanding that bricks-and-mortar retailers have an Internet presence," said Anisa Keith, an analyst with the College Retirement Equities Fund, New York. However, consumers also "like the comfort a bricks-and-mortar store gives them. They know if something goes wrong there is a real store with real people."
"I think they'll be very well positioned to serve consumers in the way consumers want to be served," she said. "Online retailers without a store presence will see that."
She pointed out that several Internet companies are now getting into ventures with store retailers.
Microsoft Inc. has set up a venture with Tandy Corp., through which it will set up in-store shops in Tandy's Radio Shack stores to sell Microsoft products.
The combination strategy will work best, she believes, "for specialty retailers and big-box retailers," including The Gap, Tandy and Best Buy Co. Inc., Minneapolis.
CREF owns 869,000 shares of Best Buy, 5.6 million shares of The Gap and 1.7 million shares of Tandy.
Although she "used to be firmly in the camp that the bricks-and-mortar guys would win because they have better sales and marketing," J.P. Morgan's Ms. Pardo said, she's not so sure anymore.
There is "a real sense of urgency among manufacturers and vendors" who sell to retailers, "to get the online sites up and working," she said.
However, she doesn't think that either group -- online retailers or store retailers with Web sites -- necessarily will win out. She believes winners and losers will come on a case-by-case basis.
