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Joe Kunkle What’s next for the direct to consumer theme?

The direct-to-consumer (DTC) theme has been a strong focal point for management teams early in 2021 as additional lockdowns have impacted traditional business models. Mobility, as a broader theme, continues to flourish.

Streaming media is seeing sharp growth with the launch of Disney+ [DIS] witnessing history-making rapid adoption. Netflix [NFLX], meanwhile, is also coming off a strong report. The shift towards direct-to-consumer media is also impacting the massive global advertising industry, as budgets shift to social media and connected TV (CTV), validated by the sharp growth seen in recent results from Roku [ROKU] and Trade Desk [TTD].

Tech and consumer services are not the only sectors seeing the DTC theme play a large role, though. Healthcare is on the brink of a major revolution with at-home testing & health monitoring.

Climate Change is also having an impact. The recent unusual weather event in Texas has shown the need for generators, and Generac [GNRC] is a top performer this quarter.

 

"Climate change is also having an impact"

 

The gaming industry is also undergoing major changes with boosts from not only regulatory tailwinds, but also a shift to more online gaming. This has meant recent success for Penn [PENN] and DraftKings [DKNG], as US sports betting has seen fast adoption.

Ecommerce continues to see strong growth, with it now accounting for an even larger part of the retail pie. There have been very strong numbers this quarter from Amazon [AMZN] and Shopify [SHOP], the two largest players in ecommerce, while Etsy [ETSY] and Chewy [CHWY] — as more niche plays — have also performed well.

Another emerging theme in the JK DirectToConsumer Signature Sharebasket — available to trade exclusively on CMC Markets — involves changes to the restaurant industry as food delivery and ghost kitchens gain popularity. Companies continue to shift towards selling directly to the consumer, and high-end brands are also utilizing personalisation. Two top names coming off stellar quarters are Yeti [YETI] and Sonos [SONO].

 

The year so far

Looking back at the first two months, the JK DirectToConsumer Signature Sharebasket has seen strong performance, with 10 of the 31 components up 20% or more and only five down 5% or more.

A few top performers already mentioned included Sonos, Generac, Roku, Chewy and Etsy [ETSY]. Other top contributors include TelaDoc [TDOC] in the telehealth theme, Illumina [ILMN] in the genetic testing theme and Tempur-Pedic [TPX] — a mattress maker that has seen major success with online sales. Chegg [CHGG] — a provider of digital education solutions — has also performed well, as have some medical technology plays like 1-Life [ONEM], DexCom [DXCM], and Axonics [AXNX].

Peloton [PTON], meanwhile, has been the major laggard as investors have taken profits and shifted to the reopening plays. A few others that surged at the height of the pandemic and now face tougher competition in 2021 include Quidel [QDEL], a medical testing company, and Masimo [MASI], a patient monitoring play. Dominos [DPZ] has been a top food delivery name, and apparel stocks like Nike [NKE] and Lululemon [LULU] were more resilient than peers.

This will be taken into account at the quarterly rebalance as some of the stocks sitting in the on-deck circle, to use a baseball reference, have performed very well year-to-date. These include iRobot [IRBT], DraftKings, Stitch Fix [SFIC], Pinterest [PINS], Ally Financial [ALLY], and Wayfair [W].

Below are some considerations from management teams on the topic of DTC.

On Sonos’ recent earnings call:
“We will continue to focus on strengthening our DTC efforts and engaging even more deeply with consumers. We are increasingly focused on direct distribution and engagement to ensure we are delivering a great end-to-end experience for our customers. We have seen that consumers are willing to engage and transact with a trusted brand like Sonos and expect that that will only increase over time. As you know, we've been focused on leading with DTC, and our DTC performance accelerated in the first quarter. We had a very strong holiday selling period, led by growth across all of our product categories,” said Patrick Spence, CEO at Sonos.

 

"We will continue to focus on strengthening our DTC efforts and engaging even more deeply with consumers" - Patrick Spence, Sonos CEO

 

On Roku’s recent earnings call regarding new streaming services launches:
“Now with regards to your question about whether these services will cannibalize AVOD consumption, first of all, they either, in the case of Peacock, already carry ads or, in the case of HBO Max, plan to carry ads. I think we're led mostly by the fact that these services launching are drawing more consumers into streaming. They're creating an even better case for consumers to cut their cord and move more of their viewership to Roku, to streaming. And that then accrues to deeper engagement across the board, inclusive of ad-supported viewing. And it's furthermore helpful that all of the recent DTC services have an ad-supported strategy in place because that bolsters the overall narrative in the market that we've been on for years now about the importance of advertisers investing in OTT. So all in all, we continue the launch of these services to be a good thing for Roku, for consumers and for advertisers,” said Steve Louden, CFO of Roku.

On Tempur-Pedic’s recent earnings call:
“The second area that I'd like to highlight is our brand strength. Tempur-Pedic was the original DTC mattress company with a marketing model focused heavily on television advertising. However, over time, the ways in which consumers engage the media has changed. Over the past few years, we've updated our advertising model to focus more on digital and social media channels that allow us to reach the modern customer. This improved media mix, combined with compelling messaging, has proven to be a powerful combination to ensure that our industry-leading brands remain top of mind for the consumer. Over the past year, we've seen significant increase in consumer consideration and purchase intent. In fact, according to a recent consumer survey, Tempur-Pedic boasts the highest intent to purchase store since we started tracking it in 2017. On the third-party retail front, we continue to build momentum as we selectively add to our footprint. In fact, we recently added new distribution to several established retail chains. At the same time, we've been focused on building our own DTC channel, both online and with brick-and-mortar retail stores. Over the last five years, our DTC business has grown from 3% to 13% of our total sales. In addition to representing a meaningful component of sales, our direct business is also quite profitable. In fact, we believe that we have one of the fastest growing, most profitable DTC bedding businesses in the world,” said Scott Thompson, chairman, president and CEO of Tempur-Pedic.

 

"Over the past year, we've seen significant increase in consumer consideration and purchase intent" - Scott Thompson, chairman, president and CEO of Tempur-Pedic

 

On iRobot’s recent earnings call:
“While it is still early days, we made considerable progress in this area over the past several quarters. We have continued to invest in making our website a desired destination for current and prospective customers. For example, during the fourth quarter, we enjoyed strong sales of an exclusive Roomba-Braava bundle, added a financing option for our European customers, successfully scaled to support the busiest online shopping days of the holiday season, and gained valuable experience in moving with agility and creativity to increase traffic and drive conversion. As a result, our DTC sales more than doubled in the fourth quarter and generated 11% of total 2020 revenue, up from just 6% in 2019. We view our DTC channel as a powerful complement to our strong retail partners. We expect that this higher-margin channel will grow to at least 15% of total revenue in 2021 and are optimistic that DTC revenue will exceed 20% of our total revenue by the end of 2023 even as we continue to enjoy growth with our retail partners,” said Colin Angle, chairman, CEO and founder of iRobot.

On Manhattan Associates’ [MANH] recent earnings call regarding its omnichannel solutions:
“We've just completed taking our customers through their third retail peak season on Manhattan Active Omni. And as you would guess, we process an all-time record high number of orders, shipments and payments. The ongoing channel shift from brick-and-mortar to digital ecommerce continues to benefit our omnichannel business and as we help more customers successfully capture and deliver on their DTC orders. Our particular note this year was the surge in store-related digital activity. Almost all of our Manhattan Active Omni customers use that technology to power a pretty vibrant ship-from-store program. But now, we're seeing an increasing number of those customers actually prefer to ship from their stores, actually up 300% over 2009 retail peak. And this is in order to speed up customer delivery and manage the parcel network constraints much more effectively. And as you might imagine, in-store pickup programs continue to accelerate at a rapid rate, with activity both in curbside and traditional store pickup. Both the in-store pickup and curbside delivery programs clearly are here to stay, and we continue to leverage our advanced version of technology to provide these kinds of innovative solutions to our customers at a very rapid rate. On a related note, one of the byproducts that are booming digital business is, unfortunately, very often, booming volumes and returns. And all of our customers grapple with this so-called reverse logistics problem. But fortunately, Manhattan offers technology to optimize that full life cycle with best-in-class capabilities in the contact center, digital self-service for the end consumer. And purpose-design capabilities for the distribution center for processing the physical goods. And while the volume of returns in many ways is inevitable, a greater customer experience isn't always the same. So, delivering that great experience for returns and exchanges at high-volume really does take a fully-integrated order management system and WMS to effectively process those returns,” said Eddie Capel, president and CEO of Manhattan Associates.

In closing, the multiple themes in the JK DirectToConsumer Signature Sharebasket continue to gain momentum, and most of them remain in the early stages. This makes an exciting time for investors to participate as these companies could deliver strong growth for many years to come. 

Disclaimer Past performance is not a reliable indicator of future results.

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