The Strong Get Stronger

Matthew Gordon, CFA

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What We’ve Learned About Businesses in Q2

After digesting Q2 results from a wide range of companies, it is clear to us that well-positioned businesses are taking advantage of their strength in the current environment to gain significant market share.

For example, our clients own shares of leading industrial products distributor W.W. Grainger. During the quarter, Grainger outgrew their end markets by 12%, as smaller competitors struggled with reduced demand and many were forced out of business.

This dynamic is even more pronounced in retail, where secular trends like e-commerce and omnichannel (e.g. order online and pickup curbside) have accelerated during the pandemic, as shown by this chart from McKinsey:

A key element of our investment thesis for Ulta Beauty is that we believe the company is positioned to take market share over many years due to investments they have made in e-commerce and omnichannel prior to the pandemic. These investments have already begun to pay off, as CEO Mary Dillon highlighted during their Q2 conference call:

From a channel perspective, e-commerce achieved record growth in the quarter, delivering sales growth in excess of 200%. Curbside pickup and buy online pickup in store were very strong during the quarter, totaling about 20% of total e-commerce orders as guests embrace this limited touch beauty-to-go option.

Additionally, e-commerce customers are more profitable for Ulta, as Dillon explained later during the same call:

And so while you can debate sort of the margin impacts of e-com, we know the total value of this customer is quite significantly strong. Because most of our guests historically have started as store-only, and then started to shop online with us as we saw their spend triple

We don’t currently own shares of Target, but we still follow the company because they compete with certain of our portfolio holdings. Target reported same store sales growth of 24% in Q2, with the fastest growth coming from e-commerce and omnichannel. On their call, CEO Brian Cornell described the power of Target’s omnichannel capability:

In addition, as I’ve mentioned in previous calls, channel numbers don’t tell the full story because they don’t measure the benefit of our work to position our stores as hubs at the center of our digital fulfillment. When you look beneath the surface of the reported numbers, you find that our stores actually drove more than 90% of our second quarter growth, given that they enabled more than 3/4 of our digital sales and an even higher percentage of our digital growth

Together, our same-day services saw more than 270% comp growth in the second quarter, outpacing overall digital growth. Among these services, we saw the fastest growth in Drive Up, which grew an astonishing 734%. We also saw incredible growth in Target sales fulfilled by Shipt, which were up more than 350%. However, even though we have offered pickup in all of our locations for more than 5 years, in-store pickup sales increased more than 60% in the quarter.

If you would like to read more about our thoughts on retail, Summitry’s Director of Research, Michael Kon, previously wrote about our approach to Investing in the Retail Apocalypse on this blog. But it is not just leading online and omnichannel retailers benefitting from the current environment. Small businesses are increasingly growing their direct-to-consumer sales by purchasing ads on Facebook, Instagram, and YouTube. Despite a slowdown in traditional brand advertising due to the lack of live sports and decreased consumer demand during the pandemic, spend on direct response advertising increased during Q2. As Facebook COO Sheryl Sandberg explained:

After seeing flat year-over-year revenue growth in the first few weeks of April, we saw a considerable recovery in May and June. Our total ad revenue for Q2 was $18.3 billion, which is a 10% year-over-year increase. This demonstrates not only our resilience as a company but a wider trend that has been underway for some time. People are spending more and more time online so businesses need to be online, too. This was true long before the pandemic, but it is especially true now…

Along with our free tools, personalized advertising is a lifeline for businesses, especially small businesses who can’t afford broad campaigns aimed at mass audiences. For just a few dollars, now more than 9 million advertisers use our platforms to reach audiences interested in their products… In today’s economy, when businesses are struggling and customers aren’t physically walking into their stores or restaurants, this is more important than ever.

These are just a handful of examples we observed during Q2 across the businesses we follow. Clearly the strong are getting stronger, which is an important reason why Summitry focuses on investing in leading businesses with strong competitive advantages. Many businesses can do well when times are good, but exceptional companies grow stronger in challenging times like today.

Interested in learning more about our research? Contact us today!

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