Why apparel retailers are poised to outperform

Macellum Capital Management CEO, Jonathan Duskin, joins Yahoo Finance to discuss the future of retail as stores continue to reopen and the state of e-commerce.

Video transcript

BRIAN SOZZI: With successful activist campaigns at Bed Bath and Beyond and calls under its belt, the CEO of Macellum Capital Management is laying out a case for apparel retailer is being undervalued writes Jonathan Duskin in a note, quote, "The traditional apparel retail sector spent enough time wandering aimlessly in the desert and they are now poised to emerge." Jonathan Duskin is here with us now to talk about this. Now, Jonathan, good to see you again here. I read this as you sending a message to the apparel space that if you don't shape up, we're coming for you. Why did you write this?

JONATHAN DUSKIN: Well, actually it wasn't so much an activist take, it was just our perspective on what's going on in retail right now, and where we see, you know, the next two to four years how we think it's going to play out. And we think it's a very unique time for retailers, particularly apparel retailers. There's a lot of dynamics that are going to favor them. You know, much like we saw coming out of the Great Recession, I think retailers, apparel retailers are poised to really outperform over the next two to four years for a host of reasons. You know, you read some of them, but inventories are low, they learned to do more with less during COVID, stores and now a weapon. We really think they're in a good position.

- One name absent from this missive, Jonathan, is Kohl's. Now, you won that activist battle, I would say, back in mid April. Are you still holding Kohl's, and have you been pleased with your interactions with the company since?

JONATHAN DUSKIN: Yeah, we are, and we have. We're in a great position with Kohl's, it's an outstanding retailer. We think the future for them is exceptionally bright. You know, we highlighted oftentimes that their off-mall strategy is really great, and they use stores as a weapon more than most. You know, the ability to do curbside pickup, BOPUS, returns, you know, they're really taking advantage of that and leveraging that against the competition. So we think they're really poised to take a lot of market share coming up in the next couple of years. So we're very excited about it.

JULIE HYMAN: Hey Jonathan, it's Julie here. One of the other things you write about is that the market in many cases does not value these retailers' e-commerce operations properly. And in many cases, the e-commerce are the things that have really outperformed during the pandemic. Are there any retailers you see in particular where that's the case? Where they really have outstanding e-commerce operations that can stand to be appreciated better by the market?

JONATHAN DUSKIN: It's a great question, you know. If you look at all the, let's call them omnichannel retailers, and their e-comm businesses, they're actually outperforming online-only businesses, and they're growing faster than online-only businesses. And if you look at the Hudson Bay that owns Saks recently sold I think 25% of their saks.com for I think was 2 and 1/2 times revenues. It's a dramatic, dramatic valuation. For example, if you looked at Macy's e-comm business and put the same multiple in that, you'd get the rest of the business for free. So these businesses are growing fast, the money has been spent to build out their e-comm strategies, and their omnichannel strategies, and I really think they're very well positioned to compete now against the e-comm-only businesses.

MYLES UDLAND: And Jonathan on that point, you know, I read this note and I had to laugh thinking through my closet and sort of the way that I was micro-targeted as an urban-dwelling millennial through the 2010s, the model of the UNTUCKits, the Caspar's, Bonobos, Warby on my face, all this kind of stuff. You say that it's been mostly disproven, and I look back on that era and it was kind of like retailers saying, how can we hack the system with blitzscaling ads and all this kind of stuff. What's the next hack maybe that comes into this space, you know, for whatever society looks like on the other side of a pandemic? Where do you think the retail business tries to go from here?

JONATHAN DUSKIN: Well, ironically, I think it's about stores. I think it's about creating that omnichannel presence and giving the customer what they want. They want to be able to shop where they want to shop, when they want to shop, how they want to shop. They want to buy online, pick up in-store. They want to return it to the store, the ability to ship from store is a great weapon. And if you look at I think the fallacy of the e-comm-only businesses, it was that the variable, the fixed cost they hope to fix advertising wasn't fixed. Advertising got more and more expensive, and they had to buy, you know, pay more for keywords. And if you look now, the cheapest way to acquire a customer is with the store. Given all the bankruptcies and all the vacancies, you can actually open a store and really acquire customers much more effectively than you can buying keywords.

BRIAN SOZZI: Jonathan, is your next target likely to be in the apparel space? Certainly, there's good companies doing things correct I look we were just talking about American Eagle Outfitters, they have two businesses doing very well. They're leading in e-comm, but they're not a lot of other companies in apparel like an American Eagle and many others.

JONATHAN DUSKIN: Honestly, we haven't picked out our next target. You know, we're canvassing the universe, we're looking for opportunities, but nothing's really jumped out at this point yet.

BRIAN SOZZI: And before I let you go, do you think the Amazon effect-- you talk a little bit about this in the note-- is just overrated?

JONATHAN DUSKIN: Well, look, Amazon was game-changing, it changed the way we live, the way we shop, the way we purchase what we need. But I always say like, if you want like socks and underwear and Levi's 501 and you know your size, great, go to Amazon. But if you want to try to buy a shirt or a sweater or something like you want to shop around and touch it and feel it and try it on, it's really difficult to shop on Amazon. So I do feel like there's plenty of room for traditional retailers, now omnichannel retailers, to take share back from Amazon. Look at, I think Best Buy is probably the best example of that. Look what they did over the years, you know, they were just showrooming, and now they're taking share back from Amazon.

BRIAN SOZZI: All right, we'll leave it there. Jonathan Duskin, the CEO of Macellum Capital Management. Happy hunting, we'll talk to you soon.

JONATHAN DUSKIN: Thank you.