Analysis: Black Friday and Cyber Monday Break New Records as Online Sales Explode

Investing, Investing Data, Investments
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The fanaticism and fervor of this year’s Black Friday did not disappoint. There was hair tugging at the Wii U display in Target, a shooting outside of Wal-Mart and long lines as consumers nationwide waited to bust down the doors the day after Thanksgiving.

But while Black Friday did not disappoint, the even bigger success story here is that of Cyber Monday’s explosive sales growth in light of a quickly evolving retail landscape.  This analysis puts together the numbers behind both major sales dates, comparing traditional versus online shopping, to find 3 key takeaways:

  1. Black Friday 2012 outperformed the past 5 years in stock market performance, while Cyber Monday 2012 was likely the busiest ecommerce day in history;
  2. Traditional shoppers became more tech savvy consumers this year both online and in stores, with in-person shoppers using both apps and smartphones to try to secure better deals;
  3. Online shopping exploded on both Black Friday and Cyber Monday, seeing higher conversion rates this year.

These positive Thanksgiving weekend numbers may not bode as well for a flourishing holiday shopping season, however.  The real lesson?  Traditional retailers are trying – and need to keep trying harder – to innovate in order to successfully compete with e-commerce.

Black Friday 2012: A Success By Many Measures

Our financial markets perceived this year’s Black Friday to be the most successful post Thanksgiving shopping day in the last 5 years too, with the S&P 500, Dow Jones and NASDAQ up 1.3%, 1.35% and 1.38% respectively. Performance of the retailers with the most to gain from a strong Black Friday was mixed; notable outperformer was Macy’s that fared half a percent better while JC Penney was the biggest laggard trailing the S&P by a full percent.

A Brave New World: Learning to Compete With Online Retailers

To be sure, this was a different Black Friday than in past years. The tradition is on the verge of needing a name change, as many retailers chose to encroach on Thanksgiving festivities, opening doors Thursday evening to give customers a first swipe at this holiday season’s hottest toys and tech. Many of the deals extended through the weekend.

The shopper experience is changing dramatically as well.  MarketWatch reported that seven out of ten Black Friday shoppers were toting smartphones armed with apps to ensure they were receiving the best deals (they weren’t, as we explore later).  Further, online purchases topped $1 billion in Black Friday sales marking a 26% increase from last year, according to digital analytics company comScore.

IBM published a study further dissecting the portion of Black Friday sales taking place online. Compared to last year, online orders were small in both number of items and total monetary value, shopping sessions on retailer websites were shorter but the conversion rate of online shoppers that physically trekked to the store was up 9% versus a year ago. The data points to a growing trend in analytics; shoppers are armed with apps, websites and other media outlets so they know the best deals and are able to nimbly navigate stores and websites to get them.

Case Study: Best Buy Matches Online Pricing

Best Buy CEO Hubert Joly was recently quoted saying his company loves being the Internet’s showroom. His company’s stock price would tend to disagree; it has declined 55% in the last year. Black Friday’s record busting online sales underline Best Buy’s largest issue: converting test drivers to buyers. For years consumers have been testing out products at Best Buy only to buy them for less on sites like Amazon, the most successful online retailer last Friday.

In order to compete with these online retailers, Best Buy invoked a “match any online price” policy. This policy was supposed to be suspended during the week of Black Friday, but Best Buy continued to honor the policy on a case-by-case basis. This strategy has put considerable pressure on Best Buy’s margins that have been sliced in half year-over-year from 4.2% to a measly 2.1%. This summer, founder and former CEO of the company Dick Schulze offered to take the company private for somewhere between $24 and $26 a share, but his proposal fell on deaf ears and now the stock is trading around half that.

Cyber Monday 2012: A Full Blown Success

If Black Friday was a success both in stores and online, then Cyber Monday was an all out victory. ComScore estimates that Cyber Monday will have been the busiest e-commerce day in history, hauling in around $1.5 billion or roughly a 50% increase over Internet sales made on Black Friday. Brick and mortar stores gave up most of their gains, dragging the Dow down with them, while online retailers and brands fared pretty well buoying a modest gain in the NASDAQ. Notably, Best Buy, primarily a brick and mortar business, behaved like an online retailer with the stock up better than 6%.

Here is a chart of how brick and mortar retailers and brands performed relative to major online shopping sites:

Online retailers clearly fared the best, with eBay up 5% and Amazon up 1.5%. Brick and Mortar suffered with the one real exception of Best Buy. Brands were mixed with Tiffany and Vera Bradley leading the luxury brands category.

Outlook: Does This Bode Well for Holiday Shopping Numbers?

We had record-breaking sales on Black Friday and Cyber Monday. What does it mean for the upcoming holiday shopping economy and beyond? Unfortunately, probably not much. The Washington Post cited a chart made by Capital Economics that showed a weak negative correlation between strong Black Friday sales and strong cumulative holiday sales. In other words, it is more likely that a strong Black Friday will be followed by a weak overall holiday season or that it will have no affect than it is to indicate the beginning of a strong season.

The irrational demand shock of Black Friday is stronger than you might think; NerdWallet Shopping released a study finding that 90% of surveyed 2012 Black Friday ads contained the exact same items – and prices – as the same stores’ 2011 ads did.  Furthermore, the Wall Street Journal reported that roughly 1/3 of “door buster” deals are available for less at other times throughout the year and often from the same retailer.

Nonetheless, shoppers turn out in droves to take advantage of these deals. The concept of door busters piggybacks an old grocer strategy of putting bare essential items in the back of the store to tempt quick pick-up shoppers into buying items they didn’t plan on buying as they walk by them. Ever seen milk at the front of a grocery store? Doorbusters are essentially the same idea; retailers under-stock hot tech and toy items and sell them at a steep discount to drum up demand. Customers line up for these items that sell out within minutes of the “door bust” and retailers cross their fingers that other items in the store satiate the pent up demand.

Black Friday and Beyond: Top Investing Picks

Given this changing world of retail, where do you put your money? You are best served staying out of big box retail companies, but if you have your heart set on investing in one I would suggest Target. YTD the company has outperformed the broader market by 15%. Target has rebuilt its strategy around sidestepping Wal-Mart as the low cost retailer and positioning itself as a more premium offering with exclusive designer and appliance deals. This has helped Target achieve an operating margin of 7.6%, which is 29% higher than Wal-Mart’s. Premium brands like Vera Bradley and Kors are poised to have a good year; the former entered a bullish technical formation in recent weeks and the latter has seen its stock double this year as Kors has blown the doors of street expectations with earning surprises ranging from 22% to 111% over the previous 4 reporting periods.

A smaller box retail name that has appealed for years despite some negative attention of late, most notably rumors of a David Einhorn short position, is high-end yoga and athletic apparel maker Lululemon. The seminal retail metric is revenue per square foot and shockingly Lulu ranks third on the list behind only Apple and Tiffany. Lululemon stores only average 35% the square footage of an Apple store but their primary business is yoga pants and not premium computers. IBM’s study of online Black Friday shopping also showed that apparel was one of the better performing sectors seeing an order value increase of 5%.

To quote the Grinch, I wouldn’t touch Best Buy with a 99-and-a-half foot pole. Despite estimated $50 billion in revenue this year, operating margins have been completely depleted. While the showroom effect is largely overblown (a recent study showed they only make up about 5% of Best Buy shoppers), the effect of the internet retailers is still substantial when you consider the pressure they have put on Best Buy’s margins. Best Buy intends to launch as many as 50 smaller Apple-inspired stores with training-enhanced employees. It is a step in the right direction, but it is most likely too little too late.

Amazon is another name I cannot recommend. CEO of Netflix, Reed Hastings, posits that Amazon loses anywhere from $500 million to $1 billion a year on its streaming prime service. The Kindle Fire is known to not be profitable through pure hardware sales and it received a major Black Friday discount. Amazon CEO Jeff Bezos is a master of spinning profitability shortfalls as short-term investments necessary for long-term gains. The company is simply doing too much and as Amazon seeps into new markets the investment picture becomes increasingly murky.

Black Friday Is Not Your Key Economic Indicator

In closing, Black Friday should not be a binary make or break investment decider. The US and global economies continue to cast a somber picture of financial health in the short term. The fiscal cliff and European debt crisis both way heavily on the investing environment and a hypothesis based on the outcome of those events will steer an investor more accurately than Black Friday and Cyber Monday sales, as good as they may have been.

Disclaimer: The views and recommendations in this piece are held by the individual contributor and do not necessarily reflect the opinions of NerdWallet.