Here to Stay
Wednesday, July 20th, 2005
By George Leong, B.Comm. for Profit Confidential
You probably all know that the Internet is here to stay. Brick and mortar stores will also remain, but the trend towards establishing an on-line presence has never been stronger. All major retailers have an on-line presence, and, so far, web sites have proven to be a nice additional source of revenue for traditional brick and mortar businesses.
The fact is, it costs a lot of money to build a physical store location and the payback takes years. It makes sense to build an on-line store. It’s much cheaper, and it opens up global markets for goods and services. Hey, you can’t beat the cost-reward trade-off here!
Just take a look at J.C. Penney Company Inc. (NYSE/JCP). The mass retailer has over 1,000 stores throughout the United States and Puerto Rico, as well as 62 Renner department stores in Brazil. The company is looking for additional growth. A potential candidate could be Canada. The problem is, however, that the cost to establish a physical presence in the already crowded marketplace in Canada is inhibitive. JCP doesn’t want to take the risk, and I don’t blame it.
Powerhouse Wal-Mart Stores Inc. (NYSE/WMT) has been in Canada for years, dominating the retail landscape. JCP entering the same market would be foolhardy. So the next best thing is to develop an on-line presence targeted at Canadian consumers. And guess what?
The company has just launched its Canadian site to try to squeeze more revenues out of its product line. Whether it will work is yet to be determined, but the risk was relatively low. And low risk is what you want in a competitive retail environment.
The best example of a pure on-line retail play is Netflix, Inc. (NASDAQ/NFLX) in the consumer movie rental market. Blockbuster Inc. (NYSE/BBI) is currently the dominant player, with about 9,100 stores, but its projected earnings growth is a dismal 6% annually over the next five years. This is pitiful, especially since the company has spent tons of cash to run its operations. BBI is losing market share to not only other movie rental operators, but also the new crop of on-line rental outfits such as Netflix Inc., who was the first major innovator. NFLX’s estimated five-year growth is 17% annually.
To fight NFLX, BBI is increasing its focus on the on-line rental market as it tries to fend off aggressive players.
Personally, I still like to browse through my local Blockbuster store to choose a movie to watch, but sometimes I’m tempted to just sit at my computer and order my rentals on-line. Think about it. For a low as $9.99 a month, I could get unlimited rentals from NFLX. At Blockbuster, you can’t even rent two new releases for that price. Hey, the concept of on-line rentals is enticing–I’m sure I, too, will soon join the masses and order on- line. Since I already do my banking on-line, as well as order movie tickets, groceries, and clothes, however, I may never get a chance to leave my computer if I start renting movies this way, too!
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Tags: penny stocks, Wal Mart
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
