3 Winners Of The Post-Brand Apocalypse

To say retailers have had a tough time this year is an understatement. The SPDR S&P Retail ETF (NYSE: XRT) is down more than 6%, underperforming the S&P 500 by almost 17% to date. The weakness across the group doesn’t begin to illustrate the pain felt by brands like Under Armor (NYSE: UA), down 31% this year, and Ralph Lauren (NYSE: RL), down 17%.

The meme has been that apparel stocks and other traditional retailers are facing a difficult road simply on the shift from department stores to online shopping. Many investors have stuck with branded retailers and analysts continue to talk up the power of brand recognition to rationalize a target price. 

While the shift to online shopping means incremental losses in sales, it’s masking a larger trend. Many of these once-valued brands may not have a shot even if they can execute on an online strategy.

The Retail Nightmare Isn’t Just Online Vs. The Mall
Scott Galloway has been studying the evolution of consumer brands and the digital revolution for decades, first as the founder of Prophet Brand Strategy and Red Envelope and now as a marketing professor at the NYU Stern School of Business. 

#-ad_banner-#He’s been following the market share of some of the strongest brand names and may have just called the “death of the brand.”

Galloway noted in a recent Bloomberg interview that Amazon, Google and the large consumer search sites are effectively taking the power from brand names. 

“Amazon has conspired with 500 million consumers, cheap capital, artificial intelligence and now voice to starch all of the margin from brands and give it back to the consumer. The sun is past midday on the great era of brands. Two-thirds of the largest CPG [consumer packaged goods] brands in American lost revenue and 90% lost share [last year].”

When consumers would make buying decisions in the past, they would subconsciously fall back on the recognition and strength of brands. Stores put branded products front and center because they were high-margin and consumers defaulted to the brands they knew.

Companies like Amazon and Google have unimaginably deep data available on consumer preferences and purchases that can be used to drive buyers to products irrespective of brand strength. Through consumer search data, these websites are able to steer you to the product that fits your needs even if it isn’t a recognizable brand. 

Galloway adds that, “Seven of the fastest growing brands on Amazon are brands you likely haven’t heard of before. Consumers no longer need to defer to the large brand anymore. Our favorite brand is the one that Amazon, TripAdvisor, or Google tells us is our favorite.”

For investors, this means companies with expensive valuations reflecting presumed brand strength may not be as valuable as once thought. Besides a competitive environment that will make sales growth difficult, especially for consumer discretionary products, companies may find they need to ramp up spending on marketing.

Finding Winners To Survive The Death Of The Brand 
It may not be long before the market starts to realize that brand names aren’t worth as much as previously thought. When that happens the bottom could drop out of valuations for luxury goods and some consumer companies.

Positioning for the new reality in retail means looking for companies with sales growth without relying completely on brand recognition. Look for consumer goods names selling at discounts on a price-to-book basis relative to their industry and branded competitors.

Another telling metric to watch will be intangible assets as a percentage of total assets booked by the company. The booked value of trademarks, copyrights, and brands will need to be marked down when companies realize they aren’t able to use branding to drive sales.

Central Garden & Pet (Nasdaq: CENT) produces and sells pet, lawn, and garden products throughout the United States. The company sells through 28 brands with differing levels of awareness and consumer targets. 

The company trades for 2.8 times book value and has grown sales by 3.4% over each the past three years. Central Garden & Pet was founded in 1980 as a distribution company but has evolved through 40-plus acquisitions into a retail powerhouse in its two segments. 

Gildan Activewear (NYSE: GIL) manufactures and sells basic apparel under a range of names with some brand recognition, but not the luxury-status or prices of its competitors. The company’s manufacturing facilities are spread across the globe for efficiency and its share in developing markets should help support sales.

The company trades for 3.2 times book value and has grown sales by 5.7% on average over the past three years. The high percentage of intangible assets to total assets doesn’t bother me as much because of the company’s strong sales growth and solid market share gains reported in the first quarter.

UniFirst Corporation (NYSE: UNF) operates a different model in the apparel space with its rental uniform service. The company distinguishes itself by offering full-service uniform service instead of simply manufacturing the garments. This level of service helps lock-in business customers for lower turnover and revenues from both sale and services. The company trades for 2.0 times book value and has grown sales by 2.7% over each of the past three years. 

On the other side of the argument, you may want to avoid luxury brands and other apparel manufacturers with pricey valuations, weak sales growth and a high-level of intangible assets like Coach Inc (NYSE: COH) and VF Corporation (NYSE: VFC). 

Risks To Consider: The consumer landscape continues to shift. While these consumer goods companies may do well as more expensive brands lose their value, they may also eventually fall to shifts in consumer shopping.

Action To Take: Avoid companies valued on the perceived strength of their brand and position in companies of off-price products with strategies outside of brand competition.

Editor’s Note: Billionaires and institutional investors are dumping hedge funds. They’ve already pulled a record $100 billion. What they’re doing with their money now could be the one clue you need to secure your wealth forever… Full story here.