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The Fastest-Growing Segment of the Best-Performing Sector

The Internet and mobile devices have changed business and changed the way we shop.

The majority of U.S. workers can now do their job remotely on a regular basis. Want to buy a home? You can go online to check listings and comps. Want to buy a car? There are websites for that.

If you want to watch a movie or television show, you’ve got plenty of streaming services to choose from.

Right now, you are reading this article on either a computer or a mobile device.

The fastest-growing segment of our economy is online – and it continues to demonstrate strength, time and time again.

According to the U.S. Census Bureau, e-commerce sales totaled $83.9 billion in the second quarter. This was up 4.2% from the first quarter. But it’s up more than 14% from the second quarter of 2014.

Now, at the same time, total retail sales were $1.17 trillion, which was up 1.6% from the first quarter. So, online sales accounted for 7.2% of all retail sales. But its percentage is growing.

And it’s increasing in a more pronounced wave…

AMZN Quarterly Revenue Estimates 2011-2015 chart

Retail e-commerce sales in the United States have grown by double digits every quarter since the fourth quarter of 2009.

The segment has gone from generating $8.23 billion in the first quarter of 2001 to $83.9 billion in the second quarter of this year. That’s an increase of more than 900%.

The Driver of Growth

Obviously, the world of retail has changed a lot in 20 years. With more and more sales being made online and through mobile, brick-and-mortar stores are facing a bevy of new competition.

Not only is there the 800-pound gorilla in the space, Amazon.com (Nasdaq: AMZN), but there’s also Wayfair (NYSE: W) and eBay (Nasdaq: EBAY). Not to mention Etsy (Nasdaq: ESTY), zulily Inc. (Nasdaq: ZU) and a host of others.

Despite grumbling and concerns over consumers and the U.S. economy, these online retailers have performed better than the broader markets…AMZN EBAY W verses S and P 500 Performance 2015 YTD chart

In the second quarter, revenue at Wayfair increased 66%, year over year. The number of users increased 53%.

Just as important, 34% of all orders came from mobile devices.

Reporting third quarter results last week, Amazon announced that its sales increased 23% to $25.4 billion.

That’s great news for the company as we enter the holiday season – i.e. the time of year when sales really begin to take off.

AMZN Quarterly Revenue Estimates 2011-2015 chart

Today, a retailer can’t survive without a strong online presence. This is why, over the last couple years, my focus in the retail space has been on companies that have two pillars of strength: an expanding and solid e-commerce segment… and a revenue stream largely dependent on the U.S.

The reasons behind this are:

  1. The U.S. consumer is the strongest in the world (plus there’s no foreign currency headwind to deal with).
  2. During the holiday shopping season, a large portion of total sales comes from online and mobile.

Last year, holiday sales online increased by double digits, while mobile devices accounted for half of all traffic – an important milestone as it’s the first time that ever happened.

Expectations this year are for similar increases. Though some retailers will see even bigger jumps – as much as 40% to 50%.

The Continued Importance of the Digital Age

Nordstrom (NYSE: JWN) receives 19% of total revenue from online sales. The company, which is primarily just in the U.S., saw net sales increase 9.2%.

Its off-price business, Nordstrom Rack, saw sales increase 16%, with online sales increasing 20%. Meanwhile, online sales at its HauteLook brand increased 50%.

Because of all this growth, online sales wound up representing 19.65% of Nordstrom’s total retail sales in the second quarter.

For Neiman Marcus, which filed to go public in August, online sales accounted for 25.5% of its business. In the luxury retailer’s recently reported fourth quarter, online sales increased to $324 million – or 28% of total sales.

For all of fiscal 2015, Web sales at Neiman Marcus grew 13% to $1.3 billion. In fact, it may surprise you, but the company is actually ranked No. 43 of the top 500 Internet retailers.

Ulta Salon Cosmetics (Nasdaq: ULTA) and Nike (NYSE: NKE) both increased online sales by more than 40% in their recent quarterly reports. Now, only 4% of Ulta’s total revenue in the quarter came from e-commerce, but it is growing this segment by at least 40% per quarter.

In its second quarter – its smallest in terms of revenue – Columbia Sportswear (Nasdaq: COLM) reported net sales increased 17%. U.S. net sales increased 45%, accounting for its largest chunk of revenue. And sales from its prAna brand rose 375% in the quarter. They’re up 1,049% through the first two quarters of 2015.

Columbia’s e-commerce sales growth has offset some unfavorable conditions in the Chinese, Korean and Russian markets. But after its strong showing in the second quarter, the cold-weather retailer raised guidance for the full year.

For Columbia Sportswear, these final two quarters account for the lion’s share of its business. Last year, 60% of total revenue and 90% of total profits came in during the second half.

There are ongoing concerns about the U.S. economy and retailers. But the retailers that are lamenting their current woes are the victims of their own mistakes. The sector has remained resilient, creating an experience for shoppers 24/7.

This is the season for consumer spending. And more importantly for retailers, it’s the season of e-commerce consuming spending.

We’ve all experienced the long lines and checkout mayhem during the holidays. Is it any wonder why so many people are opting to place their orders online instead?

I know I’d rather spend my Thanksgiving evening at home versus lacing up my combat boots and heading down to Wal-Mart.

Good investing,

Matthew

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.


About

Matthew’s expertise ranges from classic industries such as oil and mining to cutting-edge markets like small cap tech, cannabis, 3D printing and cloud computing. With almost two decades of financial experience under his belt, Matthew’s knack for finding market trends never fails to surprise us, which is why we keep a close eye on his free e-letter, Profit Trends.

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