5 Picks For The Subscription E-Commerce Boom

Genia Turanova's picture

Friday, April 12, 2019 - 2:30pm

by Genia Turanova

The world of subscriptions keeps growing and developing. In entertainment, the massive success of the streaming music, video, and video-game applications pushes others to innovate. (Deloitte estimates that the number of streaming music subscriptions alone now exceeds 150 million.)

The New York Mets, for example, recently announced a new subscription-based program of their own. For a flat fee of $39 per month, subscribers can get standing-room-only tickets to nearly every regular season home game, even at the last minute. 

Many other types of businesses are also benefitting from the trend, thanks to technological advancements (and, in many cases, with the help of our newest recommendation over at my premium newsletter, Fast-Track Millionaire). 

Smartsheet (Nasdaq: SMAR) is a great example. Founded in 2005 and headquartered in Bellevue, Washington, Smartsheet is a Fast-Track Millionaire holding that provides cloud-based platforms and software that enable companies to overview, plan, manage, automate, and execute tasks and projects. Subscriptions start at $14 per user per month. With an enticing business model in a high-growth area, it's no wonder then that we've already made more than 21% on the stock since the end of January. 

Of course, Microsoft (Nasdaq: MSFT) was one of the first companies to successfully transition from selling software to selling monthly and annual subscriptions to its cloud-based Office 365 programs.

And retailing will probably never be the same, thanks to subscription pioneers like Dollar Shave Club, a start-up that had the novel idea of selling shaving supplies inexpensively by subscription. And the innovative model paid off in spades: the fledgling company sold itself to British-Dutch consumer goods giant Unilever (NYSE: UN) for a cool $1 billion in cash in July 2016. 

All of this got me to thinking, so I set about to create a list of several retailers from two major groups: those whose business revolves around subscriptions, and those who have begun experimenting with subscriptions in order to modernize the business and capitalize on brand loyalty.  I've included a list of companies that meet these criteria in the table below... 

FTM stock screen

U.S.-based Blue Apron (NYSE: APRN) runs a meal-kit business with a subscription-based distribution. The company's two-person plan costs $59.94 weekly, and its family plan is priced at $139.84. 
About a year ago, a supermarket leader Kroger (NYSE: KR) acquired privately-held meal kit company Home Chef in a deal valued at up to $700 million. Meal kits -- a set of ingredients to prepare a meal at home -- are what attracted Kroger to Home Chef, as part of the supermarket's business-modernization efforts. Home Chef had been one of the best-managed companies in the business, by many accounts. This acquisition gave a boost to the share price of the meal-kit companies, but it didn't last. 

Since the acquisition closed in June, a wave of pessimism has shrouded the industry. Critics pointed to slowing growth and an absence of profits and questioned the entire business model. Share-price action over the past year reflects this pessimism. From the July 2018 high of $3.92, the stock plunged to as low as $0.66 in December, only to recover to the current $1.15.

While there are no guarantees that the business and the share price will improve, at current levels Blue Apron presents an interesting play for investors who believe in the future of subscriptions in general and meal-kits in particular. 

The Chefs' Warehouse (Nasdaq: CHEF) is a company that distributes specialty food products to other businesses. But even this well-established company, with little consumer-facing business, also has a subscription model: a monthly steak subscription from its Allen Brothers subsidiary. This is not a new option on the market -- premium-quality meat has long been a popular subscription item -- but CHEF runs an attractive, profitable, growing business that should stay on the investors' radar. 

Stitch Fix (Nasdaq: SFIX) is a clothing retailer whose business largely depends on subscriptions. It's the company that gets well-deserved credit for making apparel a "subscribable" category. 
We used to own this stock over at Fast-Track Millionaire; thanks to our good timing, we made a 55.1% return on the shares in September, having managed to sell the stock well above the current levels. It's been on my radar ever since, and I might come back to this subscription leader if its growth and customer metrics continue to rebound. 

The next two companies on the list are not subscription-focused, per se, but are experimenting with this method of expanding revenue by capitalizing on their loyal customer bases and on the quality of their offerings. 

Both are sporting goods companies, but their fortunes have been quite different lately. 

Under Armour (NYSE: UAA), a branded performance apparel, footwear, and accessories company, faces competition in most categories. But this is a company where annual profit growth is expected to exceed 28% -- and its subscription box experiment is likely to contribute. 

UAA offers a so-called "curated" subscription -- the company's dedicated "Official Outfitter" handpicks 4-6 pieces of UAA gear that fit a customer's needs, style, and goals, and send it to their doorstep. This is designed to surprise and elate the consumer -- and UAA offers this service, called ArmourBox, with a frequency of 30, 60 or 90 days. 

Lululemon (Nasdaq: LULU), another athletic apparel company that has been successful in building its own brand and a fierce following, announced in December that is was starting to test membership subscriptions. These services are expected to be priced at $96 a year, with free items of clothing, free yoga or fitness classes and free express shipping as part of the package.

With a growth rate that is expected to approach 20% per year for the next few years, LULU, one of the strongest brands out there, remains an interesting stock from all points of view.

Action To Take
I think most of the companies on this list are attractive at current levels, for a variety of reasons. But keep in mind that this list is only intended to give you a starting point for further research.

I plan to keep all of these stocks on my radar. In the meantime, if you'd like to see what else we've been up to over at Fast-Track Millionaire, go here.

Genia Turanova does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.