A weekly podcast with the latest e-commerce news and events. Episode 214 is an interview with Scott Devitt, Managing Director of Internet Equity Research at Stifel, discussing the potential economic impacts of Covid-19.
Episode 214 is an interview with Scott Devitt, Managing Director of Internet Equity Research at Stifel, in which we discuss the potential economic impacts of Covid-19.
In this interview, we discuss the travel, hospitality, and e-commerce industries, with a deep dive into some of the factors that will impact Amazon.
To receive Scotts research and analysis, send an email to him [email protected] and ask to be added to his distribution list.
Don’t forget to like our facebook page, and if you enjoyed this episode please write us a review on itunes.
Episode 214 of the Jason & Scot show was recorded live on Thursday, April 2nd, 2020.
[0:24] Welcome to the Jason and Scott show this is episode 214 being recorded on Thursday April 2nd 2020 I’m your host Jason retailgeek Goldberg and as usual I’m here with your co-host Scot Wingo.
[0:38] Hey Jason and welcome back Jason Scot show listeners hopefully everyone is surviving their quarantining and shelter in place
and Jason and Times of Crisis like this I find I get really down in the weeds it’s kind of just pulled out plow through everyday grind it out
but sometimes it’s helpful to talk to folks that work at a higher level they’re seeing a broader spectrum of not only
companies but Industries and then the macro environment and the best place to look for that is Wall Street So to that end we are excited to have one of the top internet analysts on the show Scot debit
Scot is managing director of Internet equity research at stifel welcome to the show Scott.
[1:21] Hey guys thanks for having me.
[1:23] We are thrilled to have you Scott other than the fact that I am now feeling outnumbered to Scotts to only one Jason.
[1:30] Yes the between the three of us we have two of us we have three teas.
[1:34] Yes the S is are also popular so it’s got a tradition on the show we always like to start getting a little background about the guests so could you tell us a little bit about your background and then what your your area of focus or your role is its default.
[1:47] Sure sell-side analysts and cover the consumer internet sector.
Mostly u.s. space companies and the sub sectors include e-commerce you know so Amazon
that’s see Peloton the real Railway fare Stitch fix but we also cover Alibaba and JD in China and then their digital names include Netflix and alphabet we also Cover online travel and the ride-sharing companies as well.
[2:20] That’s awesome and have you always been a cell size analyst or how did you how did you come to the veal.
[2:27] Sure I worked in industry for a few years mostly at Dell after graduate school and then for the better part of the past 20 years I’ve been
I’ve been in this role started out as an associate analyst working for a senior analyst back in 2000 and then it kind of worked my way into the
into the role shortly thereafter we cover my team covers about 35 companies in total us internet.
[2:56] Pickle so your Universe for kind of folks on the phone so on the e-commerce side you have Amazon Ali Baba at see everywhere you put Peloton there’s that e-commerce you think of it I guess I think of it as a digital native brand.
Real real Wayfarer Stitch fix and then you also cover Netflix you mentioned all that Google.
JD JD on your list.
[3:21] GD GD booking Expedia Uber Lyft yes.
[3:25] Yep and we’re looking cool let’s start at the big picture and then we’ll kind of peel the onion as we go as it were.
So clearly this pandemic were as a recording this the jobless claims came out six million new jobless we’re going to clearly,
but the economy into a bit of a tailspin here what’s y’all’s big picture on kind of the how this plays out is this a v-shaped recovery is this 18 one thing a six-month and give us give us an overview of kind of the
the big picture.
[3:54] Yeah I can.
I can give you my personal view of that from just a macro overlay standpoint I mean I think I track the data every day as does everybody else and
it’s pretty rough out there right now
but you know but hopefully we do kind of get to the other side of the virus and you know the underpinnings of the economy going into this we’re quite strong
their stimulus behind us so you know I think my base case you know that then influences
my coverage and and modeling of internet companies would be something between like a V and a U-shaped recovery on the back of this and in as it relates to.
[4:42] Internet specifically we expect the advertising business to be down
ten to fifteen percent that’s roughly in line with what it was down in the o89 crisis certainly at the bottom
you know it could be worse but but that’s a good starting point until we start to hear these companies actually talk about current conditions e-commerce interestingly
right now is running above Trend because of the mix shift the Staples and groceries so overall recently Trends have accelerated according
third-party services like Adobe data today to 20% plus but
you have certain categories that are down as much as fifty percent in grocery that’s up as much as a hundred percent so very much depends on the products that one is selling within travel.
[5:32] And and and ride sharing which is tied to travel you know conditions are quite weak down 50% or more very much tied to the
the airline and hotel industry so that gives you a broad kind of picture of like the base case it’s now built into our models if I had to guess you know I would guess
are numbers you know probably going down further before they go up.
[5:58] Yeah yeah and so if we can think about how this will play out people report q1.
The quarter just ended so we’re going to have kind of 45 days of that and then you know they’re only going to have kind of a 15 to 20 day view of how things were right well the time they report that may be able to shed some more color so just feels like we’re gonna have a lot
you’re probably three to six months of bad news before we can kind of get to the good news of if I think through the way that all plays out.
[6:27] It’s probably in the best interest of companies to
just remove you know any any formal guidance for remained other year and you know potentially give qualitative assessments of current conditions but beyond that
just wait until more information is available and I think that’s probably the the best approach that corporate could take right now and some companies have begun to do that
Twitter data at the few other companies did it outside of our my coverage universe but you know a simple related company Shopify did it overnight so I assumed that
any company that does within my coverage give guidance is probably going to pull it back when they report.
[7:09] Yeah absolutely so let’s start at the the most heavily hits this travel industry you know I saw something that said like Travelers or down 92%
Jason’s are most frequent traveler and I have he hasn’t traveled in like four weeks so he must be just chomping at the bit.
[7:26] The I did something last week that I haven’t done in about 4 years I put my suitcase suitcase away.
I mean it sounds silly but it felt very weird.
[7:40] So so for that to come back Scott what do you think they have two you think we’re going to like change the configuration of planes so that we’re six feet apart going forward or like what what do you think it takes to kind of build confidence back in that industry.
[7:55] I think it will be a slow rebuild it’s hard to kind of determine.
[8:00] You know consumer Behavior coming coming back out of this and you know how corporations like say the airline industry you know will need to operate for a period of time
it’s probably too early to guess but but
but spaces in between seats is an option initially that’s not something you know that’s in place now but the flights are so empty that it doesn’t really matter
and you know I think I think in the end.
[8:34] The airplane configurations will likely be consistent with what they were historically but as we come out of this and consumers you know again
we gain confidence and things like
traveling you know that you could have instances like that and you know our expectations for the online business which is you know directly tied to Airline bookings and hotel stays is not down
you know as low as like the occupancy levels that you hear some of the hoteliers talk about what your 10
yeah roughly 10 15 percent but that’s just because we have built-in expectations of you know recovery starting
you know this summer which may prove to be
optimistic so are you know the bottom of our estimates get down to you know closer to fifty percent versus the 80% because month by month we actually begin to assume that things recover and that’s like I said
a few minutes ago you know in many cases I think as we update things you know our expectations will slowly grind lower you know as we get more information.
[9:34] Yeah I haven’t been I’ve been so focused on my own stuff I haven’t really looked at the ride sharing group have they been hit as hard as the travel industry or people still using ride-sharing in a pandemic scenario.
[9:48] No it’s about the same.
And it’s it’s very much tied to that but even even with the lockdowns that are occurring you know where you don’t have trips that are directly tied to travel
you know those are down meaningfully like like in some cases close to a hundred percent our estimate for to queue for ride sharing is down 50.
And and if the lockdowns hold through June you know then that will prove to be.
And aggressive estimate numbers will be lower than that.
So you have to look at these companies you know to the extent that your your listeners focus on things like this you have to look at these companies and look at balance sheet you know and things of that nature because some of these companies are going through a period right now
where if they don’t have solid balance sheets they could run into some considerable troubles.
[10:41] Yeah absolutely yeah it’s a lot of people didn’t have Pandemic in their crisis planning.
So you talked about within e-commerce obviously grocery is kind of over indexing and whatnot and then he said some categories are down as much as 50% what are what are some of the categories that aren’t doing well in e-commerce.
[11:02] Let’s see fashion down 51 percent according to one of the data sources that we look at.
Luxury retail down over a third e-commerce you know in aggregate
outside of Staples and grocery down almost 50% so anything that is.
Really consumer discretionary with a few exceptions
or down because you have you know offsetting that you have some of the stay-at-home benefit like
things like fitness equipment and you know other categories that are holding up better because PCS are doing quite well because people are rebuilding offices at home
and you know but the biggest driver right now of this growth this kind of 20th percent growth is just a mix shift
to grocery which is you know lower margin category but from a volume standpoint you can definitely see it in like Amazon’s hiring plans.
[12:07] Yeah you know it’s been funny like there’s there’s categories that that are up that are intuitively obvious like you mentioned that you know everyone’s buying the equipment for their work at home setups or their teach at home setups I’m always fascinated by the sort of.
Less obvious trends that start to emerge so across a bunch of my clients a product category that’s wildly up that makes sense but I would have never thought of is adult puzzles.
You know step stuff I got his people.
[12:37] That doesn’t make sense after you bring it up.
[12:39] Yeah once you see it you’re like oh yeah of course but those are the kinds of things and and you know what we’re starting to see what we didn’t see in the first two weeks but we’re starting to see now is all the at home.
Beauty care right so you know set everyone realize they’re not going to get to their salon and have their hair recolored or their nails done or their haircut and so suddenly everyone’s on YouTube learning how to trim their own hair with clippers and everyone’s buying.
Clippers and at-home hair kits and things like that.
[13:10] Yeah what’s most interesting you know that I found
in going through other other down Cycles whether it was you know mm or 108 o9 is that some you know is monitoring these changes in consumer habits
And trying to assess those that don’t revert bat because from an investor standpoint you know I think the internet generally speaking tends to be a
a significant market share Gainer
on the back end of down periods and and those consumer habits that change to something that is
better than what they were doing before under normal conditions consumers are very slow to change but in periods like this
they have to out of necessity and so that tends to drive you know significant kind of investment opportunities when you do get to the other side that benefit names like.
Amazon and an alphabet and and and and maybe even a Facebook but also something like a Peloton you know that a cover where there is an underlying Trend underway to Fitness in the home
that you know potentially is accelerated by this and it really doesn’t slow down on the back end of it.
[14:25] Yeah it that that is fascinating and difficult to figure out right because there’s some categories where you go it’s pretty obvious it’s not going to revert so if you bought a Peloton your.
You’re probably not joining the gym in three months or at least your you’re less likely to because you have that.
Capex now that you’ve invested in at home fitness but if you were having your groceries delivered.
[14:53] It’s a completely open question whether you’ll keep having your grocery delivered after the pandemic or whether you’ll go back to.
To shopping in the grocery store and I bring up the grocery one in particular because they’re it feels like there’s any even extra Paradox there like obviously with everyone Sheltering and home we’ve got.
Way more people trying at home grocery delivery or trips had grocery delivery than ever before which which the digital groceries are thrilled with.
But the experience that’s being delivered is the worst possible version right so.
You know every delivery is late every delivery is missing a bunch of items and has a bunch of you know weird inappropriate substitutions and then all these things and so there.
You know amongst the folks I’m talking to it’s a super open question like they’re getting way more Trials of their service than they ever had and could ever imagine but many of those customers aren’t having a great experience and are using it out of necessity so once.
Once this sort of pandemic a baits like it feels like a really unknown.
How much are those those behaviors stick or how many of those customers they lose because the experience was some up you have any like how do you even think about that but.
[16:04] Well you know everything is a hypothesis right now and.
Giving given where we are you know my with I totally agree with it with everything that you said in terms of it’s not necessarily a better experience you know groceries been slow to transition for reasons Beyond just consumer
the pace of consumer habit change because going to the grocery store is actually still quite convenient what may come of this is I think in the case of grocery you will you will very likely get a reversion back to
going to the store to get groceries because it’s still quite efficient and cost-effective but that you may have consumers more willing to,
supplement the experience with you know certain.
Categories whether it’s whether its buying the dishwashing detergent and things that hadn’t come to mind that that the consumers now realized that is readily available to get delivered to the home that could have an impact on overall trips
but you know it’s a it’s not one where I think you’re going to have a full-scale transition
over to direct distribution of grocery they’ll be some benefit it won’t be near what you’re seeing at the moment.
[17:19] Yeah I wanted to go back to something else you had said earlier like obviously you know they’re all these categories that are.
Wildly down and you know they’re mostly implementing austerity measures and trying to you know figure out how they can weather this and and you know we’re all trying to figure out.
How whether it’s a v-shaped recovery or a U-shaped recovering what that looks like.
I wonder if there’s a difference though like some of the categories you’re talking about like airlines are hotels I know I know there’s an occasional debate but like I think in general.
It’s known that there are nominally profitable models or at least the unit economics are favorable and they you know Airlines and hotels have demonstrated that they can deliver their services profitably and so.
When when they’re thinking about a recovery they’re trying to get back to where they were before but you know there’s a bunch of these businesses like Rideshare and Uber where.
Like nobody’s demonstrated that the unit Economics work so when they like lose all their revenue it just means they’re burning through their investor were War chest faster than ever before.
Like is it our those companies are less likely to have a recovery than companies that have a viable unit economic model or or.
You know do you feel like that Uber is going to be in the same shape afterwards that they would have that they were in before.
[18:43] It’s a great question on one hand Uber and Lyft or much less levered,
but they’re not they weren’t profitable businesses going in the way that the Airlines and hotels were but they’re certainly much less levered
then the airline industry so if you were to this is something that boobers said publicly if you were to run bookings down 60 to 80% for the rest of the year,
Uber still ends the year with four billion dollars of cash and and access to a two billion dollar revolver left in fact doesn’t have any debt so you know there
they you know that seems like a
pretty close to a worst-case scenario in terms of that we stay down here for the rest of the year so I’m comfortable thinking that neither of those companies has balance sheet risk but to your question whereas in the airline industry
certainly without the the.
The federal government providing funds that whole industry potentially you know would go away before the end of.
3Q if not to Q because of the leverage in the model and.
[19:53] And so I think you know we still have to prove the unit economics of ride sharing any other side but to the extent that travel does recover you know I think that both companies sit in.
In relatively strong positions and the question for everyone involved in that industry hoteliers.
Airlines in ride-sharing is what do volumes look like
Under The New Normal on the other side to Scotts earlier question of what have Airline configurations look like how do people travel what a conferences look like and how many are done virtually Etc all those things that we don’t yet know yet we’re going to have you know
potential long-term ramifications on on the trends across that industry I’m you know of the view that we will get back to
normal at some point in terms of people traveling the way that they once did but that could be much longer than other Industries in their past back to normality.
[20:51] Yeah so one other question I know Scott super eager to get to Amazon and I promise we will in a second but one other question to benefit all the CEOs listening to the show this week
a pre-pandemic a common conversation I would have with a retail CEO is.
This challenge around making strategic Investments because there’s lots of strategic Investments that like the CEO
knows that they need to implement for the long-term benefit of their company but many of them have adverse effects on short-term revenue and profitability and you know
frankly like most CEOs feel very locked into.
Performing against their comps and so while there’s a ton of negative stuff about this pandemic.
Like I have a hypothesis that like one small Silver Lining is like a lot of businesses are going to be off the hook for comping this year and they’re like they’re they’re me you know maybe a one time opportunity for.
Companies to sort of reset expectations with their investors and make some more forward-looking Investments since.
Like for most businesses there’s just there’s no hope that they’re going to favorably comp against last year given this like.
Am I thinking about that right or is that is that just Whimsical thinking on my part.
[22:12] I think it depends on the depends on the the impact you know.
Current conditions at any individual business in terms of like the first thing to address our current conditions to the extent that one can address current conditions and still have the flexibility to think about strategic,
options that are deeper into the future and have a capital position which they can deploy Capital then I think your
your scenario in a makes sense because no one’s really going to be looking at at numbers in the near term in terms of profitability outside
just flat-out solvency so I think every situation is quite unique to what that Corporation is dealing with.
[23:00] Coppola wouldn’t be adjacent Scott show if we didn’t dig into Amazon a little bit what’s your what’s your macro thoughts on the impact of the corner virus on Amazon.
[23:11] Well from an e-commerce standpoint you know I think that Amazon is is.
Doing quite well you know mix shift certainly to cpg grocery,
you know could have margin implications I’m sure there’s costs Logistics wise and hiring wives to deal with this you know that.
[23:40] Could have impacts on profitability they’re seeing a mix shift you know away from FBA right now because of the way that they prioritize
Essentials and that has a negative impact on 3pf be a yes so there’s there’s Justice
kind of the minutiae if you will that you know has a net negative impact on the margin profile of the business but I think the
power the strength of this company within e-commerce is more evident today than it’s ever been and Amazon’s of pure example of when we do come out of this a company that will be in a stronger position because
if the government doesn’t seem to be focused anyway on saving the retail industry
and so you had a companies that were on potentially week paths before this
which those paths have been accelerated on you know Macy’s in is an example that’s been in the news in the past week and that happened during the oh 809 crisis and a lot of that share gets reallocated among
the strong company is the same thing will happen again so e-commerce wise I think never been stronger
really and and this is the shines a light on
I think the power of Amazon’s model within their Cloud business you know you’ve seen some data points out of Microsoft that also showed that the way that the economy has transitioned
you know in some ways at least is beneficial to the cloud business Amazon’s like.
[25:03] Spin as it relates to investment ideas probably the most Rock Solid company in fact it’s the off the checklist but I think it may be the only company that I cover that was up.
Year-to-date through 1q the stock is actually up in 1q.
[25:20] So the cloud I could almost argue that they could have some challenges are because it’s a lot of startups using the cloud and we’re gonna probably have less the failure of startups is going to spike for sure and less new starts but
the same time you could argue these larger companies are going their workloads are all going to continue to move to the cloud I guess do you think Amazon’s delivery.
Capability I was thinking through this someone’s so that there is they did that one day walk out and then they fired that guy,
and they said he wouldn’t keep social distancing and I’ve been doing Amazon warehouse before and people are like shoulder-to-shoulder at some of these pick lines I wonder if it’s reduced their Cape their capacity just having to do implement
social distancing and procedures like that at the warehouses have you seen any data on that.
[26:11] I’ve not but I but I think that is.
That is likely yeah that may have an impact on overall efficiency yeah I mean.
[26:21] To your margin point.
[26:23] Yeah that you know have an impact on margin and of course you’re seeing you’re seeing I’m sure in your personal life changes in delivery times and things of that nature but that’s more related to this
favoring of Essentials than anything else but as it relates to efficiency I’d be surprised if it’s not down.
[26:40] Yeah it’s interesting when I talk to Merchants you know to your FB a point there there actually,
you know a lot of people have a hybrid model where they’ll have some stuff in FBA and some stuff out there for the first time ever the stuff that’s not an FBA is getting much higher pull through than the stuffs an FBA because it seems like Amazon is putting these really long delivery times on the
the non-essential FBA stuff so then I think we’re also seeing that spill over into the other e-commerce providers that people normally.
Wouldn’t start out like a Walmart or Target I know they’re not in your coverage University think you think they take a little share from Amazon here or,
the share is really the way to think about it is the Commerce guys take a ton from the offline guys that are closed and that’s how to think about it.
[27:27] And and you’re speaking to like Walmart’s Marketplace business or just Walmart in general.
[27:34] Just just I guess more their e-commerce business you know I’m seeing more people online anecdotally saying you know gosh I’m ordering from Walmart and Target now because the delivery times on Amazon of gotten so long.
[27:45] Yeah yeah certainly I think that Walmart.
Costco come to mind less familiar with the activity at Target right now but I would assume they’re getting a bump in their business as well so.
[28:02] All four of those companies I don’t cover three of them but it’s safe to assume they’re all seeing lifting their business as it relates to like share shift within e-commerce you know potentially
there could be some of that because of the way that Amazon’s D emphasizing FBA but but I think they’re probably doing well.
Holding their own and you know and doing quite well in terms of delivery guarantees on
the essential side which is where all the growth is right now I’ve just anecdotally you know we I think we’ve probably had 15 Costco boxes in the last you know two weeks show up and you know it started out on time
then before you knew it you know the delivery times were backed up a good five days we had a Wegmans order
you know that it took five days to wait to go pick it up at the Wegmans by the time that 5th day came up they canceled the order so I think you know many companies are
we’re having issues you know and I think Amazon’s probably relatively well positioned versus even those bigger traditional
General merchandisers as well but you know we’ll see I mean earning season it’s going to be the craziest earnings season
since you know I’ve been doing this in 20 years and probably I think some that have been doing this even longer than that I’m not sure how far you have to go back to to have something that’s comparable
you know to this but we have a lot more information within the next two to four weeks as companies speak for the first time about current conditions.
[29:31] You know I feel like Amazon’s investment in their own delivery network is
they obviously didn’t know this was coming but it was very very smart because now they don’t have to fight over that one FedEx truck that’s making it to my neighborhood every week they have six Prime vans.
Spin around and doing that so I think that’s been a huge Advantage for them to own the full vertical ization of that supply chain.
[29:57] I totally agree and having so many different
distribution centers as well I mean they haven’t been impacted in the way that some of them my smaller coverage has like like the real real as an example
they have to fulfillment centers in the US they both been shut down for different reasons you know so so the fact that Amazon is so distribute in the way that they are
there haven’t been any noticeable issues that have made it into the media but even to the extent that they do run into
issues at certain places they can reroute you know and still deliver to the consumer.
[30:31] Are you in the camp that Amazon ultimately competes with FedEx ups with her fulfillment or do you think they keep it as an internal capability primarily.
[30:42] I’ve I’ve always had the view that their competition with FedEx and UPS is more about pulling.
Product off of that grid and into their ecosystem so effectively FBA.
And in combination with an increasing percentage of the fleet being Amazon trucks is the way that they.
Ultimately compete with UPS and FedEx versus the more think creative out-of-the-box thought that they that they ultimately provide
similar services to those I think they’re already having an impact in terms of just simply the way that the.
That the size of Amazon’s network is growing that it’s pulling product outside of UPS and FedEx and that’s kind of been my.
My base case for the direction that they’re heading that’s all that they’ve shown to the outside world
you know to date and if that changes you get more visibility to something more distinct than you know change my view there but I’m not I’m not over the view that they’re building
UPS and FedEx internally.
[31:49] Are you following and worried at all about what happens to USPS and all this because it like is you probably know.
The post office is Amazon second.
Biggest delivery partner after themselves and for most of the rest of e-commerce it’s the biggest delivery partner and they’re in serious financial distress they you know weren’t included in the stimulus package so it’s
it seems like their future is uncertain.
[32:18] That’s a problem,
I did see that they weren’t included in the package and and you know there have been other rumors around as well in terms of their operations during this crisis so I mean that’s just going to be something.
It’s an important partner of Amazon so you know it’s definitely going to be something that could be a problem to the extent that their activities you know slow during this period or
or even you know beyond this period that the Postal Service struggles to operate I again in this area My Views been that.
The government will ultimately keep the Postal Service.
Running because it’s necessary you’ve seen some political.
Kind of calisthenics around this topic and that Amazon is not paying enough but
but without Amazon them in the you the Postal Service would be an even worse position so it’s kind of an interesting debate and one that will continue on but but I don’t think the Postal Service you know we’ll just we’ll just go away it will get funding
even if it comes at the last minute.
[33:30] Yep yeah I certainly hope so it’s hard to imagine a world without it what one thing you know you talked about.
E-commerce in the mix being you know shifting much more to Essentials and so there’s there’s sort of winners and losers in that.
One thing that I imagine is a bit of a bummer for even the winners is it feels like this new mix is fundamentally less profitable right so you know I know you don’t follow Target but like targets an example where
they’re ordinary mix with skewed heavily towards non grocery Grocery was a much smaller piece of their total mix than Walmart or Costco.
And so now that you know they’re mix is skewing heavily towards grocery that.
Grocery is systemically less profitable and then the way that all these guys are having to deliver grocery right now all the extra hoops and supply chain challenges.
It feels like it’s less profitable than ever.
[34:25] I agree the only one that doesn’t have quite the same impact so that would that would have an impact on the Amazon Walmart and Target left so Costco because of their markup model Costco you know
Garner’s a higher margin on their Kirkland brand you know which is probably not doing well at the moment
relatively speaking in terms of
product mix so that they have a little bit of a wait there but they’re markups across their business outside of Kirkland or quite consistent so they’d be the only one I’d say that
that wouldn’t see a meaningful margin impact outside of Kirkland mix the other three
certainly you know will have a lower margin impact benefit of mix but but the downside is percentage margin.
[35:13] Yeah and that you the those retail exclusive Brands is another interesting one on following pretty closely because.
There was already a strong Trend consumer preference with shifting to these exclusive Brands and they are better for the retailer and there’s a lot of good economics attached to them.
But my hypothesis is another secondary impact of this pandemic is.
Consumers are much more open to substitution and they’re trying many more new brands than ever before so if you were super loyal to Charmin toilet paper.
Right now you’re just thrilled to get any toilet paper right so the toilet paper you get is Presto brand from Amazon.
How many consumers will decide that Presto is good enough and not go back to Sharma.
[35:57] Time will tell and you know the throw another wrench into things when you get when we do get to the other side of this you know,
if one thought that China supply chain.
Was you know a risk to retailers prior to this I’d have to think that these things are only going to get more difficult
on the other side without going into into depth in that area a you know I do think that the possibilities of nationalism protectionism and things like that certainly could emerge out of this and have impacts on the retail industry.
[36:39] Yeah so like thinking specifically about some of these ecomp layers that you follow argue you mentioned Stitch fix real real.
You know what is going to happen with those I think of Stitch fix in particular is like.
The largely been the the direct to Consumer internet darling but then you know their last earnings were slightly soft and now they’re in this category apparel that’s that you know has a ton of potential head winds as a result of the pandemic.
[37:13] Yeah so let me quickly hit on the others for that stand out that are you know kind of that
small mid-cap e-commerce company Stitch fix is on that list and the Stitch fix customer one of the.
More meaningful use cases for the product is.
Dressing for work it’s not many people you know are doing at the moment other than those that have cameras in their house and are on news channels and so I think that you know Stitch fix his business while
it’s one that certainly has the potential.
[37:48] And and I think was was executing on becoming a leader in in soft lines in this new world of distribution there
they indicated you know some potential weakness in the coming quarter and I would imagine that that.
[38:04] Is is likely happening if not even worse the real real I mentioned
you know which is used luxury items they long-term I think their business model is sound short term
they are not shipping product out of their facilities now because of not being an essential business
in California New Jersey where where those states are on lockdown so you know they’re operating but they’re not they’re not currently shipping out of the facilities
wafer is in the furniture and Home Goods business wafer is not a profitable business and it’s one that it tapped been tapping the debt markets and so you know that lack of profitability is something that
concerns investors especially when one has Leverage.
[38:51] You’re comfortable thinking that that they will be that their brand will resonate you know similar on the way out of this as it did on the way in but I think that’s a company that
in terms of the stock itself it trades more like a leopard business like an airline you know than it does an e-commerce company at the moment because it’s the one that has the most
that of these names in the final one would be at Sea which is just a discretionary item Marketplace business which there
operating at a very high level but
I would assume demand for their products is down considerably right now so you know their numbers will likely be week as well and I put them on one side of the grid is Staples and Grocery and
and the other side is everything else you know at see each one of these companies falls in the other everything else which is down 2250.
[39:42] That’s how I could almost talked myself into a contrarian view because you know Jason talked about adult gaming and
playing puzzles and stuff you can almost think if people are stuck at home it may be a good time to pick up a craft and maybe they benefit from that some degree but I guess the macroeconomic would probably swamp that.
[40:00] Yeah well I yeah I I could talk myself into anything right now and I think that’s the it’s certainly.
Certainly possible and I think you know they will probably whether it better than you know than eBay across their broad set of categories for that reason you know but,
I just don’t know you know there’s not a data source that I can point to that that fully confirms that but I think that anecdotally you know I’ve heard similar things in that category.
[40:32] Let’s talk a little bit about eBay I actually.
[40:35] Before we go to eBay Scott one other thing I was just curious on Etsy like the so it does seem like in the short term they might get more sellers right as people get laid off and.
Turn to Etsy but I like another long-term potential benefit for Etsy is I’m growing increasingly concerned about what holiday is going to look like for everyone because of supply chain disruptions right so ordinarily.
The big retailers would be planning and executing their holiday supply chain right now which you know is much more difficult and.
Like basically a hundred percent of the toys that everyone buys for holiday come from a Chinese supply chain that’s pretty heavily disrupted like there’s a there’s a contrarian view of my mind that.
People might be getting a lot more Etsy gifts for Holiday than ever before because the traditional options might be diminished.
[41:28] That’s possible offsetting that they have you know a good bit of business that’s event-driven.
Weddings and things like that and so you know it’s hard to tell but I think you know I.
That’s it to me is a very Sound business it’s well-managed it’s not levered you know and as a Securities analyst you’re thinking of stocks like that’s the type of business that.
I would want to be building a position in knowing that at some point we’re going to get to the other side but I probably wouldn’t be building a full position with the amount of uncertainty with where we are in the process right now if that makes sense.
[42:04] Makes sense so on eBay I haven’t been following very closely in the last two years I know I know the CEO left and kind of a prompt manner what’s going on with eBay these days.
[42:20] Well I mean the closest StubHub deal that was a in hindsight a Herculean effort business effectively.
Shut down shortly thereafter in terms of business operations and so the fact that they were able to get that deal done was Quite a feat
I wouldn’t feel good to be on the other side of that transaction you know at the moment but um but as it relates to that’s just you know financials and gives them access to Capital to
continue to buy back stock over time as they’ve been doing you know the underlying kind of fundamentals of the business.
[42:57] I think can before covid-19 through and on the other side and continue to be week I mean I think it best.
EBay gmv is a GDP plus a couple points you know business and and at worst it’s GDP or point less and that isn’t
is not something that I think is hugely problematic for the stock because it’s kind of priced for that.
As the way they you know we all tend to think of the world in terms of growth assets it’s just it’s not a growth asset and more and I think that’s the way that you think of it in terms of the way it’s impacting them right now
given the categories that they’re in in the fact that they’re not in the areas that have all the growth is that their numbers will be weaker than that that Trend you know near-term and more consistent with,
with overall e-commerce Trends and then when we get back to run Ray you know this business will be growing two three four.
Best case five percent again and that’s eBay.
[44:06] Yeah yeah do you think they get acquired or they just kind of muddle along it kind of to 3% for the first syllable teacher.
[44:15] Well the list of buyers isn’t particularly long but.
You know so so Ali Baba doing something and.
Even before this with the current Administration was near impossible to the extent that they ever even had an interest you know the one that’s most stood out to me.
In terms of not saying it would be a fitness area but in terms of the perception that it would be a fit would be Walmart you know but
but you know outside of that like I said I mean list isn’t particularly long and you know I don’t have a strong view in that area in terms of whether they get consolidate or just kind of slowly but surely
privatize the company through generating cash and buying back stock.
[45:05] One other thing you mentioned at the top of the show that you know you’re going to you just paying a fair amount of softness on the advertising side in my day-to-day it spiffy we do a relatively.
For us a large amount but it’s very small compared to other folks but the efficacy has gotten way better on digital advertising Jason may have a point of view on this to because it just seems like there’s a lot less competition out there for
which you know it’s an auction so it drives the bidding so so we’re actually seeing very positive things on Google and Facebook for example
what say little bit more about what your hear what you’re thinking about Google and Facebook and how they’re going to fare through the next three to six months.
[45:49] Yeah well that’s great I mean I think that one thing to consider with the advertising you know marketplaces is travel as is you know
roughly fifteen percent of the industry and so
if that’s down 50 to 80 you know you get as much as 10 percentage points of drag just alone from travel and then you have.
You know the the mix shift in terms of towards Grocery and Staples that really I think right now.
Those that are Distributing those products have less of a need to actively market and then you have everything else which I think is you know where you’re talking about whereas if you have product that selling
the efficiency of the advertising right now is probably higher
then it’s been since going back to Oedo 9 when news of what smaller businesses if you had a product that was selling but everything else you know that’s down their ad budgets are down commensurate
with their revenue so the fashion industry fashion e-commerce you know down 50 they’re not spending on on advertising and so there’s a whole like mix of
the aggregate advertising industry numbers and that’s why in aggregate you get these numbers that are down 10 you know worst-case down as much as 20 but if you have a product that sells.
You know right now I would imagine that your rates are as effective as they’ve been in years.
It’s interesting it’s I think you’ve hit the nail on the head it’s complicated because there are like Windows of opportunity there but there’s some you know pretty big scary macro Trends as well.
Someone that whose salary is largely paid from advertising on I’m trying to follow it closely but I have no idea how it’s going to play out.
I want to do sort of.
Pivot to thinking about the big picture long-term just a little bit as we kind of get close to wrapping up here the first thing that strikes me in a bunch of these segments even if the segments down are the categories down it seems like we’re.
There’s a lot of acceleration of winners and losers so I know you mentioned a perils heavily down there’s a ton of challenges in a pair at all.
Nikes probably better position than a lot of their competitors to whether that down Ness and emerge with.
Greater share versus their competition for example right and Walmart and Costco my you know are likely to emerge from the retail category stronger than some of their traditional competitors like.
Big picture does that does that just eat mean consolidation and to fewer stronger Brands and retailers and as like.
You know does that create investment opportunities or is that like fundamentally bad at like you see it playing out like that.
[48:37] I absolutely do I mean I think that to try and put it succinctly Darwinism you know is accelerated during times like now and so.
You more so than ever want to own leaders and leaders will win on the other side I mean this is a
horrible period in human history but but humans are resilient and you know it’s highly likely we’re going to get to the other side of this hopefully sooner rather than later and you know this is why companies
the best companies do the best through all environments and you mentioned Nike there’s a good list of very high quality
Brands retailers and otherwise that when we do start coming up will be significant share gainers unfortunately,
either either in a very weak.
[49:31] Categories in terms of like department stores where the world is just moving away from that generally you can still be a great operator but it’s the power of the the industry that’s dragging you know the business down or you could just not have a
great business those won’t recover and you know and I think you saw to know 809 you’re going to see it again here
if you’re building a portfolio of Securities you know and your and you think about the safety of,
of your positions versus being lever to recovery I think a lot of those blue Championship names are the names that you want to be building positions in
right now Amazon you know on that list and certainly at the top of it but Google
you know as well you mentioned you know others that that I don’t cover but there’s a long list of other names as well.
I bet Mike you would wish that they were maybe selling through Amazon at the moment but that’s a different different topic maybe maybe they will.
Some resolution there although I doubt it that would be interesting because that would help for the time being.
[50:34] So you know what’s funny about that so.
I do want to double click on that one because it is it’s coming up a ton I have a feeling there’s a lot of people that weren’t selling on Amazon that wish they were and you just hit Nike but the.
It is also interesting there are a lot of people that were single sourced on Amazon so they looked at Amazon as their primary path to Market.
Um and a bunch of those sellers.
Are really taking it in the shorts right now particularly their non-essential category so if you are a business that was built exclusively on Amazon FBA.
You are and you think you’re going to have a future at all you are right now planning a future where you’re no longer a single Source on Amazon right so you’re either talking to Walmart about being on their Marketplace or at the very least your.
You’re thinking about applying for you no vendor fulfilled.
Prime or you know augmenting Amazon with some 3pl services like is there like clearly the macro Trends are going to favor Amazon but I wonder if they lose a little bit of Market
please share as as their Partners try to diversify themselves a little bit.
[51:45] It could happen under the service is so strong when tied in with prime under
99.99% of operating conditions you know excluding this moment in time that I think that you may have you know vendors that build emergency capabilities in or
being able to Source themselves or even layering in additional marketplaces but for the most part FBA will you know
what will likely go back to right where it was
when this ends I mean that’s just that’s my view because of the power of the product but but in the meantime I think what you’re saying is you know is absolutely accurate in terms of that there
going to be contingency plans put in place it’s just a matter of how active those will be once we get through this.
[52:38] Yeah and how it isn’t Heather if they’re economically meaningful at all that farpoint like
is prime certainly is very strong hey so let’s let’s wrap up on a slightly more positive question like appropriately like there’s a lot of Doom and Gloom right now totally get it but when I’ve been looking through history at some of the.
The the near analogies to this situation like a the first thing is there is no Perfect Analogy to this situation.
But when you look at something like SARS and and its impact in China One of the interesting things to me is you mentioned you follow Ali Baba and JD.
Arguable that JD.com was founded because of SARS and for sure.
Ali Baba was dramatically accelerated as a result of SARS and today you know those are two of the biggest e-commerce players of all time.
Like is our when we look back on covid-19 and we’re telling our grandkids about this this time when we had to home-school them are they are we going to be talking about some new companies we’re not even thinking about today that.
Become giant players because of this sort of disruption.
[53:49] Very possible it certainly we’re going to be talking about the strength of existing companies you know that are that are beneficiaries of this no doubt and and then I do.
I believe that it’s very possible that you have a whole new grouping of companies that emerge from this as well and you know if you look at we have
been through as a global Society various crises over many many
decades if you just simply pull up an S&P 500 chart you know that goes back to the year 1900 I mean I think you can comfortably without getting into the weeds of the our current crisis
assume that this too shall pass you know the questions that remain are more around depth.
And duration at some point
there will be treatment for this at some point there will be a vaccine for this you know it’s just a matter of how long do we have to bridge to get to the other side and I’m as optimistic as I’ve ever been in terms of that good companies will prosper you know on the back end of this we have a period of a month to you know
a number of months to see
where we bought them before we get there and I think we’re at the still towards the front end of that as has been indicated by you know by the government and the various stay-at-home initiatives are in place in the US.
[55:08] Yeah that that that is very well said and that’s a great place to leave its God because it’s happened again we’ve used up our allotted time but really appreciate the conversation and you’re inside thing I know it’s crazy right now so thank you very much for
taking the time to sit down and talk with us.
[55:26] Thanks so much Jason and Scott really appreciate it.
[55:28] If folks want to follow you online is there a centralized place where where you publish or anything like that.
[55:35] We don’t publish actively online but you can follow me on LinkedIn you can also email me at Devitt sdev itts,
stifel.com STI Fel and we can add you to our distribution list.
[55:51] Yeah I strongly recommend that so I read pretty much everything Scott puts out its really good read and you can tell he gets kind of punny with some of the subjects it’s always fun to try to decode what is puns are on those.
[56:04] Thanks a lot guys.
[56:07] Awesome and if folks enjoyed the show we love a five star review if you’re sitting at home with nothing to do great time to write the review if you’re trying to home-school a toddler
don’t stress it don’t bother reading review just survive the next few weeks.
And so with that thanks again Scott and Scott and until next time happy commercing.