Paradigms

For the beleaguered executives of the retail C-suite the Covid pandemic was almost it, capping a brittle and bitter multi-year period that saw bankruptcy courts claim many peers and set in motion a slide in profits that would likely claim many more. The assault of Amazon.com on high streets and precincts savaged many a flat footed, living-in-the-past dinosaur, and scared witless every levered-up shopping mall landlord the world over. But with digital strategy suddenly all that mattered, the traditional bricks and mortar retailers are fighting back as the fight-or-die response to the pandemic pivoted many franchises online. And they also still have bricks and mortar. Good news, then, comes via a recent survey of cashed up consumers by Shopify, showing that whilst online shopping is here to stay, there is also substantial pent-up appetite for a day out down the shops. Indeed, as restrictions ease as much as 75% of shopping is expected to return in-person. As in ‘Hello, good morning, love the lockdown hair’ in-person shopping. Now the sector is hot. As per the recent run of earnings the retailers, both good and bad, have had it off, with everything from undies to denim flying out of the door. Many spoke on quarterly calls of lean inventories, SAAS-driven operational efficiencies and queues snaking out of the door; queues so long they had store managers frantically pulling down all promotional placards. As the tills ran hot, margins ran hotter still. And where margins go, profits follow. Leaning in on the laptop camera to ensure analysts heard right, many a revved-up CEO spoke of a new paradigm. For investors, new paradigms speak of structurally higher multiples, and a very different lens through which to view a sector that had long been consigned to the bin marked ‘existential crisis’. And yet, it is not always different. Inventories can quickly become bloated. Fashions change, leaving a hard-to-shift surplus of faux suede borg lined overcoats. Promotions begin to pop back up. For investors there needs to be conviction that the management are walking the talk. There will be winners, and losers; online and off. They can’t all win. Not with Amazon’s click-click-buy option that is only ever a smartphone away. Those that can win though, those that do walk the talk, are those where this time could well be different. We believe this could be the case for American Eagle. An established brand which has a genuine omni-channel offer, but with the added juice of an exciting, fast growing concept hidden within the portfolio. Despite share prices running hard, for investors who pick the winners – new paradigm or not –further gains could prove to be substantial.

 

The securities mentioned in this blog may be held by funds managed by Majedie Asset Management Ltd.