Millennial spending will skyrocket and these stocks could soar

"I see all the pieces of the shoes, how they are made and how Nike designs their models," said Quinones, a Bronx nursing student. Barron's. He had come to pick up his 17th pair of Nikes, the first ones he had designed and customized online: a brilliant Kobe A.D basketball in the dark with the OQ initials embroidered on the heels.

Millennials like Quinones are being courted aggressively by Nike (ticker: NKE) and other marketers, for good reason. The millennial generation, consumers between the ages of 20 and 30, surpasses baby boomers as the largest generation of history buyers. According to the consulting firm, millennium spending will represent $ 1.4 trillion in retail sales in the United States by 2020.
Accenture
.
That will account for a quarter of the total estimated $ 5,700 billion, according to eMarketer.

This year, the oldest generation will be 38, which is an advanced age for young families and household formation. Expenditures tend to increase with income as consumers reach the end of their 30s or 40s, and then gradually decline in their 50s, according to Census Bureau data. Younger Millennials, in their early twenties, are graduating from college and above and entering the workforce at a time when there are many jobs and the demand for younger workers has been strongest for years.

The coming of millennials will lead to increased spending for all kinds of industries and businesses – a strong demographic tide that is expected to continue to grow as the population grows and workers enter their peak period. great income.

"Obviously, millennium spending is expected to increase in a healthy way over the next decade or so," says Richard Fry, senior researcher at Pew Research Center.

Not all demographic changes are positive. Baby boomers spend less on retirement and save on their savings, and Gen X consumers aged 40 to 50 are not as numerous as a generation, creating a consumption gap.

The Millennials will eventually take over as their incomes rise, but that will not happen overnight. In the meantime, investors should look for industries and businesses with "population growth niches," says Pat Tschosik, an analyst who studies demographic trends with investment research firm Ned Davis Research. Companies that can take advantage of the millennial demand – which is not offset by the baby boomer or generation X declines – are in the demographic zone of choice.

How are investors benefiting from these changes?

We could invest in companies whose growth is fueled by millennial spending, but it is a piecemeal approach to what is a vast universe. Companies as different as
Amazon.com

(AMZN) and
General Motors

(GM) become investments because of the "secular" millennia demand.

Some exchange-traded funds combine all of these elements. the
Global X Millennials Thematic

The ETF (MILN) holds about 80 stocks that could benefit from the millennials' increased spending power and unique preferences. It consists of companies like
Alphabet

(GOOGL)
Costco wholesale

(COST),
Facebook

(FB),
Starbucks

(SBUX), and
Walt Disney

(DIS). Another ETF,
Millennium Generation Index

(GENY), holds a basket of globally growing companies, including an Australian educational company,
Navitas

(NVT.Australia), the Japanese retail giant
Fast retail

(9983.Japan), and Chinese Internet stocks
Alibaba Group Holding

(Baba) and
Tencent Holdings

(TCEHY).

Millennia count for these companies, but they are not the only drivers of actions. Evaluations, competitive pressures and benefits will likely have as much influence as a generational change in spending.

Barron identified five actions that are expected to benefit from millennium spending and are also of interest for other reasons. Here are our millennials, two well-known big names and three smaller and more speculative choices:

Subscription services, like Barron highlighted in a December cover, are in full swing. Millennials are not the only ones behind the trend. But many studies indicate that young people prefer to rent more products and services than previous generations. According to Accenture, 77% of Generation Y and Generation Z generations report being interested in selected subscriptions to products or services. Legions of companies are now adopting subscription revenue models for products as diverse as furniture (IKEA) and electric toothbrush heads (Philips).

This is the opportunity for
Zuora

(ZUO), a small but fast growing software company. Zuora sells a cloud platform to manage back office functions for subscriptions, such as billing, revenue recognition and analytics.

His clients include GM car manufacturers
Ford engine

(F),
Kia Motors

(000270.Korea South), and
Toyota engine

(TM); HBO Go (the direct service to the consumer); office company
Box

(BOX); and
caterpillar

(CAT).

For example, Caterpillar's earthmoving machines operate remotely with GPS and robotics. Companies pay a subscription fee for equipment maintenance and upgrades, and they use Zuora to manage their subscription revenues. The trucking companies also use a subscription software to track the hours and kilometers traveled, with Zuora as an intermediary.

The idea is to "Engage new customers, increase expenses per customer, enjoy increased customer use and keep as many customers as possible," says David Meier, portfolio manager at Motley Fool Asset Management, owner of Zuora in the MFAM Small-Cap FNB Growth Company (MFMS).

Zuora's sales are expected to reach $ 292 million for its fiscal year ending in January 2020, compared to $ 235 million for fiscal 2019. Analysts expect the company to lose 43 cents per share during this fiscal year. exercise. However, losses are reduced as incomes rise and cash flows cover a larger portion of its operating expenses. The balance sheet of the company, which stands at about $ 180 million, is ample enough to support the company for several years without further issuance of shares.

"It's a growth story," says Needham analyst Scott Berg, who was awarded the "Strong Buy" award, with a $ 30 price target on a recent price of $ 21.50. . "They target investments on short-term profitability."

Zuora's end market will be one of the most dynamic enterprise software products in the next five years, he said, increasing at an annualized rate of 25%. His earnings are expected to grow at about this rate, Berg estimates. The valuation seems reasonable, with the stock trading at 5.8 times the value of the business relative to sales, which is slightly lower than the median of software companies as a service.

Tien Tzuo, CEO of Zuora, tells Barron this profitability is not the short-term priority of the company. "We see that it's a long-term game," he says. According to him, in the automotive industry, subscription models and car sharing will be much more prevalent within ten years and will require subscription software to handle billing and billing. Other tasks. He also sees a growth of subscription software with the rise of connected devices such as thermostats enabled by the Internet and the Internet of Things in the broad sense.

Subscription-based revenue models are growing five times faster than the average of the S & P 500 companies, he said. If there is evidence that he is right, Zuora's stock could double over the next five years.

Whether or not luxury department stores survive, millennials will probably buy more luxury products online. By 2025, 25% of luxury items will be purchased online, up from 10% in 2018, says consulting firm Bain & Co. Most of this growth will be driven by Generation Y and Generation Z, which will represent 45% of total luxury. sales, up from 32% in 2017.

farfetch

(FTCH) aims to take advantage of the wave of spending. Online platform for luxury brands, the site is a condensed fashion magazine and upscale boutique. Shoppers can browse hundreds of brands or buy the "edit" style of celebrities such as Chloë Sevigny, who recently introduced a Gucci tweed coat ($ 4,980) and a Miu Miu leopard print trench coat ($ 3,650). ).

Fashion is a globally inefficient industry: small shops and brands in Europe, Japan and other regions manage sales, shipments and cross-border inventory management in small batches. Farfetch provides it all on a global scale, including same day delivery in 18 cities around the world. Luxury brands work with Farfetch because it gives them control over listings, allowing them to maintain prices and "consumer perception," wrote Jason Helfstein, an analyst at Oppenheimer, in a recent report.

Farfetch is gaining ground. The total value of the goods on the site reached $ 1.4 billion in 2018, compared to $ 910 million in 2017. Active users increased from 936,000 to 1.35 million. Farfetch also made the acquisition by buying a Chinese luxury platform to
JD.com

(JD) and an upscale sneaker and streetwear store, Stadium Goods.

Farfetch went public in September for an initial price of $ 20 and is trading around $ 25. The insiders of the company hold more than one-third of the shares and the stock could be put under pressure to sell after the lock-up period that expired on March 21. Other risks include a slowdown in sales in the Middle East and Asia-Pacific, areas with strong business growth. Analysts expect the company to lose 61 cents a share in 2019 and 45 cents a share in 2020. Shares are trading at about 11x sales, a 50% premium to the sector, according to analysts. FactSet.

But Farfetch has no balance sheet debt, $ 850 million of cash and a minimal stock. Sales are expected to increase by 30% to $ 1.1 billion in 2020, up from $ 822 million this year. Helfstein estimates that Farfetch will make a modest profit of $ 20 million in 2022, based on adjusted earnings before interest, taxes, depreciation and amortization.

The company seems defensible against Amazon.com, says Jay Nogueira, fund manager at T. Rowe Price. "High-end brands do not want to be on Amazon," he says. "The addressable market for Farfetch is huge and platform companies like this one will be winning."

Housing should be stimulated by the generation of the millennials and children.

Millennials have moved out of their parents' homes (85% of them no longer live at home). And they seem to buy after years of renting; The number of owner-occupied households increased from 62.9% in early 2016 to 64.8% by the end of 2018, while tenant-occupied households recorded a decline of 1.9 percentage points, according to the Bureau. of the census. Tschosik believes that there is a pent-up demand from at least two million housing units on the part of Generation Y who have delayed their purchases due to the recession and the market's weakness work.

Homebuilders targeting first-time buyers, such as
KB Home

(KBH), should enjoy some of the benefits of this wave. But first time buyers are more likely to buy older homes; new builds tend to be more expensive and the average age of a new home buyer is 47, making the new home more economical.

This should benefit
Home Depot

(HD), as the millennial generation buys old houses and repairs them. Household spending on home improvement tends to be highest during the first two years of the property. And in a strong economy, with wages and property prices rising, discretionary budgets should be healthy enough to support renovation expenditures.

Home Depot's shares have lagged the overall market over the past year, rising about 8%. Wall Street's attitude towards the stock has weakened somewhat, the real estate market has weakened and the company has missed estimates of comparable store growth in the last quarter. The shares are trading at their average valuation for the last five years, about 20 times the 12-month forward earnings.

However, the retailer's main sales trends remain healthy. The company expects a 5% increase in same store sales revenue in 2019, a growth rate similar to that of 2018. Housing should continue to rise, especially if interest rates fall again.

Home Depot also has better locations than its main rival
Lowe's

(LOW), says RBC analyst Scot Ciccarelli. More and more HD stores are located in dense urban areas, increasing pedestrian traffic per store and increasing sales to professional contractors, one of the fastest-growing, high-margin businesses in Canada. HD.

Home Depot stores are also concentrated in areas where household incomes are higher, which can all give it a structural advantage over Lowe, said Ciccarelli. And Home Depot is investing heavily in e-commerce to protect itself from Amazon; the company is spending $ 1.2 billion over the next few years to expand the distribution of bulky or bulky products with same-day or next-day delivery.

The title should not outperform if the macroeconomic climate of housing deteriorates. However, the demographics look favorable, and the stock should remain positive if the company can execute its plans to improve sales and profit margins of comparable stores. The stock returned 2.7% and the company recently authorized a $ 15 billion share buyback plan, or about 7% of its market value. Ciccarelli estimates that the stock will reach $ 223 over the next year, up from $ 200 recently, a multiple of 22 times the estimated profit in 2019.

Families leaving apartments in homes tend to increase spending on home furnishings. It's advantageous for
LoveSac

(LOVE), a small company that makes modular sofas called "sactionals".

Lovesac sofas and other furniture can be reconfigured, adapted, and customized to thousands of arrangements such as interlocking Lego pieces. Cushions are made from recycled bottles – which appeal to millennials who want durable products – and there's no need to throw furniture in a landfill or sell it on Craigslist because people move from flats to homes. larger living spaces.

"It's a disruptive name in the furniture business," says Brian Bythrow, portfolio manager of the Wasatch Micro-Cap Value Fund (WAMVX), which owns the shares. Lovesac draws the bulk of its sales from its showrooms, online stores and store-stores in Costco. It has gross margins of 55%, well above those of its competitors.
HR

(HR) at 40%.

Lovesac went public in June 2018 at $ 16 and is now trading at $ 42. Analysts expect the company to lose 22 cents per share in the current fiscal year, ending in January 2020, and earn seven cents per share in the next fiscal year. Shares are trading at a turnover three times that of the company, well above average for furniture retailers.

Lovesac, however, is expanding. The fiscal year 2020 business volume is expected to rise to $ 239 million, an increase of 44% over the 2019 fiscal year. The company has almost reached its threshold of profitability because it spends revenue on expanding its business, says Bythrow. "We are in a period where investors are rewarding companies that reinvest for growth," he said. "It could change. But you can get by with that today.

Nike's call rests millennium spending assumptions, as well as the company's efforts to update its product line and shopping experience. The company is deploying its vast financial resources to combine online shopping with in-store experiences, "says Jill Standish, retail sales manager at Accenture. "The Nike store experience is very unstable," she says.

The ability of consumers to design their own sneakers at flagship store kiosks allows Nike to defend itself against Amazon and other pure online retailers. According to Canaccord Genuity analyst Camilo Lyon, Nike's SNKRS app also appealed to young buyers, and the company has been successful in boosting sales through a combination of digital and in-store experiences.

"Nike strives to create a customer experience of all components of its business," he said.

Lyon points out that Nike's innovation machine is starting up; it includes the launch of a new cushioning platform for running shoes and a renewed interest in women's clothing and footwear (such as the Air Max Dia shoe).

Nike is also looking to reduce the innovation of its high-end shoes to basic "basic" under $ 100, an initiative that could take market share.
Under protection

(UA) and
Skechers USA

(SKX).

"Among publicly traded companies, Nike has adopted the most energetic strategy to deal with millennial demographics and the evolution of buying behavior," said Lyon.

The Nike action certainly seems costly at 33 times the profits of the year ended in May, according to consensus estimates. This is well above Nike's 23-year average price / earnings ratio of 23; this is a considerable premium over the P / E of the 17-market. Nevertheless, Lyon notes that Nike's multiple has always expanded as earnings growth accelerates. Analysts expect that earnings growth from one year to the next will rise from 4.9% in fiscal year 2019 to 19.2% over the course of the year. Fiscal year 2020.

The company's latest quarterly results show widespread strength with sales up 11% (in unadjusted currencies) compared to the previous year. The company has good price resistance with gross margins up 1.3 percentage points to 45.1%, driven by higher average selling prices and growth in direct sales to consumers.

In addition, Nike is financially strong enough to afford to buy a large part of its stock. It has just launched a four-year $ 15 billion stock repurchase plan, or about 11% of its $ 134 billion market value. The stock has risen 15% this year to $ 85.50, but Lyon is forecasting a further rise to $ 96 over the next 12 months.

This path will be made possible by customers such as Quinones, who came to pick up his sneakers at the Nike store in New York. He played with the hundreds of color, material and embroidery options of the Nike app before heading to the store to buy his unique pair.

Visiting the store and seeing everything in action makes him come back. "It definitely makes me spend more money at Nike," he says.

Nicholas Jasinski contributed to the report.

Write to Daren Fonda at [email protected]