Business

Department Stores Won’t Fix Amazon’s 13% Growth Problem

Read more at www.forbes.com

Amazon stock has lost 15.7% of its value since peaking on July 30 — wiping out $300 billion in market capitalization.

Is the Wall Street Journal report that Amazon plans to sell clothing and household items in department-store-like boxes a buying opportunity or a signal that Amazon’s best days are behind it?

The answer depends on whether newly minted CEO Andy Jassy can solve Amazon’s big growth problem. How so? Amazon forecasts growth in the range of 10% to 16% for the September-ending quarter — a big slowdown from its 27.4% average annual revenue growth rate in the decade ending 2020.

Nothing on the horizon suggests that he has a solution in hand. Amazon’s move into department stores looks to me like a minor experiment rather than a big bet on a growth-restoring new market.

Sadly for Amazon investors, it could be a while before investors get a hint of what might catalyze a rise in its shares.

(I have no financial interest in the securities mentioned in this post).

Amazon’s Department-Like Stores

Amazon is planning to operate shopping spaces that are 30% of the size of typical department stores. Located in Ohio and California, these 30,000 square foot stores will “sell clothing and household items and facilitate exchanges,” noted the Journal — citing anonymous company sources.

This move is rich with irony since Amazon’s online retailing helped drive many department stores into bankruptcy. As the Journal noted, news of these store openings comes “after years of taking market share from big-box operators—moves that helped to push many into bankruptcy.”

Indeed after surpassing Walmart to become the largest clothing seller in the U.S., Amazon’s online shopping service “helped accelerate the fall of mall operators and other once-potent physical-store empires,” according to the Journal.

The reason that Amazon prevailed over these department stores was that it offered consumers a relatively wide selection, generally competitive prices, reliable delivery, a straightforward payment process, easy product returns, and a reputation for continuing to improve.

Amazon’s Latest Results And Guidance

After enjoying an uptick in demand in 2020 during the pandemic, Amazon is slowing down. As I wrote last month, in its second quarter report Amazon missed the high end of its revenue forecast for the first time in two years. And the midpoint of its guidance of 13% revenue growth in the third quarter “would be Amazon’s slowest growth rate in 20 years,” noted the Journal.

Bezos left a company that disappointed many expectations in the second quarter. Its second quarter revenue grew 27% to over $113 billion — but that was $2.4 billion below what analysts expected and much slower than the 41% surge it enjoyed in the second quarter of 2020.

For the third quarter, Amazon estimated revenues in the range of $106 billion to $112 billion — the midpoint of which represents 13% growth — about $10 billion below the consensus estimate.

Amazon’s basic problem is that its faster growing businesses — “Other” and AWS — are too small to offset the slowdown in its online sales growth.

Its online stores slowed down dramatically. “Sales in Amazon’s online stores grew just 13% in the quarter to $53.16 billion from $45.9 billion a year ago in the same quarter, while analysts on average expected $57.35 billion, according to FactSet,” noted MarketWatch.

Two of its non e-commerce businesses did nicely. For example, Amazon’s “other” unit — 7% of total revenue — which sells subscriptions and advertising — grew 87%.

Revenues at AWS — 13% of Amazon’s total revenue — increased 37% to $14.81 billion $601 million more than analysts estimated. Sadly, AWS’s operating profit margin fell three percentage points due to pricing pressure, noted Bloomberg.

However, until its online stores enjoy faster growth or those faster growing business get much larger, Amazon stock could be in the penalty box.

Amazon’s Track Record With Physical Stores

Do department stores represent a new source of significant growth? Based on its track record in physical retail, I think not.

After all, while Amazon has opened bookstores, grocery outlets, and other physical spaces, it has struggled for decades in store-based retailing. Indeed after trying to get online grocery to work, in 2017 Amazon decided that acquiring Whole Foods was the way to go.

Department stores have been declining for 30 years — as the Journal noted, “A generation ago, department stores comprised 10% of retail sales. So far [in 2021], they account for less than 1%.”

To be fair, Amazon thinks that the mini-department stores could help it sell more clothing. In 2019, Amazon proposed to partner with “some U.S. apparel brands…opening large-scale stores that would showcase their products.”

Amazon has concluded that stores — which account for 85% of retail sales, noted Quartz — will help consumers pick items with the right size and fit before purchasing — a challenge for selling clothing online. Amazon also thinks such stores could give it a chance to expose shoppers to its devices — such as smart speakers and Kindles — and other products.

In general, Amazon’s physical-store sales growth has not been impressive. Over the past two years “revenue from Amazon’s physical store segment — which is dominated by Whole Foods — have been down,” noted Bloomberg.

They fell about 5% in 2020 as its online shopping boomed. In the second quarter, things improved — with segment sales up 11%, according to the Journal.

Why Best Buy
BBY
Has An Edge Over Amazon

If Amazon hopes to succeed with physical stores, it needs to outcompete winners like Best Buy. As I wrote in Goliath Strikes Back, Best Buy has done well over the last several years because it empowered its sales people to give consumers competitive prices and outstanding service.

What’s more, Best Buy’s store network is a 15 minute drive from the typical American’s house. Since they can order online and pickup what they order the same day at a store, consumers generally get what they want faster than if they order online from Amazon.

I question whether Amazon will be able to do better than Best Buy when it comes to empowering its people to serve customers and building a network of stores that can accelerate order fulfillment to exceed what Best Buy now provides.

Why Amazon Stock Could Keep Falling

It’s not all doom and gloom. If Amazon grows much faster than it guided in the third quarter, its shares could soar. Moreover, Morningstar sets a price target of $4,200 as the company “continues to add capacity at a breakneck pace in order to meet customer demand and one day delivery, even as it roughly doubled its footprint during the last 18 months.”

In general, analysts remain bullish on the stock yet they’ve reduced expectations in August. “For Amazon’s current quarter, the average earnings estimate has dropped about 16.5% over the past month. The revenue consensus has fallen by nearly $6.5 billion, or 5.5%, over the same period,” noted Bloomberg.

To keep rising, Amazon needs to grow at least twice as fast as it forecasts for the current quarter. Opening mini-department stores won’t close the growth gap.

Read more at www.forbes.com

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