Initial Read on Amazon / Zappos

Last night Amazon.com announced its intent to purchase Zappos.com for $847m in an all stock deal.  This deal is worth looking at on many fronts.  On the surface this is another data point in the large volume of tech M&A.  However, this actually transcends both tech and retailing by the very nature of what Zappos does, and that is sell footwear, accessories, and apparel. 

We have said in the past that we expect strategic deal flow to continue and we believe this still holds true.  Direct-fulfillment infrastructure and assets are valuable to those that are:

  1. Late to the game of e-commerce.
  2. Saddled with third party arrangements that outsource fulfillment and hosting.
  3. Looking to leverage growth in what is now a well-defined, legitimate, and growing way to distribute products directly to consumers. 

One thing is clear (as judged by the simple fact that Zappos is doing $1bln in revs and most people on the Street had no idea), ecommerce is alive and may actually be nearing a point where profitability on a wider scale is no longer elusive.  Scale is the key here and the consumer has voted for the ease and transparency embedded in the online shopping experience.  

So what is this company with a silly name called Zappos?  Many of us know of it, perhaps ordered a pair of shoes from the site, and (very) occasionally have heard the company mentioned by a wholesaler.  In reality, there is little public information about the company except for few facts that we can piece together from interviews with the CEO or just by poking around the site.  It is widely thought that Zappos generates approximately $1bln in gross revenues, $625m in net revenues, and $40m in EBITA.  The company was founded in 1999 and has been primarily funded by Sequoia Capital, which has invested most of the $49mm the company raised since its inception.  We’re sure you know Sequoia from its other more prominent investments in Google, Yahoo, YouTube, and PayPal. 

Most eye opening is the size of Zappos, which in just over ten years has a revenue base nearly as large as Genesco ($1.6bln), DSW ($1.5bln), and The Finish Line ($1.2bln).  The selection is unprecedented with basically every footwear brand under the sun offered on the site along with more recent introductions in apparel and accessories.  Clearly this is a scalable and flexible platform for Amazon to leverage its current and future direct fulfillment verticals. 

Initial Read on Amazon / Zappos - ZapposComps 7 09

Traditional retailers cannot ignore this transaction.  Which leads to the question, what’s a retailer to do as it reads the press release valuing Zappos at $850mm?  It’s clear to us to be competitive in the space you can either build or buy.  Most companies have built, but with a brick and mortar mentality.  Assets born out of the .com era and not 7th Avenue are likely to be more flexible, innovative, and creative.  Moreover, online only operations are likely to have been built at a lower cost than companies that have built direct businesses as “add-ons” or “extensions” of core legacy operations. 

Now to the touchy, feely portion of this.  We’re not ones to bank solely on culture, but the word was mentioned 21 times in a letter to employees from the Zappos’ CEO explaining the rationale and logistics of the transaction.  Culture may in fact be one of the key reasons traditional retailers have generally lagged behind online only competitors.  There is almost always internal conflict between the ecommerce division and the rest of a retail company.   Should there be separate buying organizations?  Which merchandise should be online?  Should promotions be the same online as in the stores?  You get the picture and there is no simple solution to these questions.  

Perhaps this is why online only entities have a leg up.  Zappos provides some context, with CEO Tony Hsieh having no retail experience at all.  Instead he was a venture capitalist with a desire to dramatically improve the customer service between consumer and retailer.  This out of the box mentality is likely to jump to the forefront as traditional retailers observe this transaction and contemplate growth in a slower growth world. 

The next step is to identify unique online players who “get it” and may ultimately “get bought”.  We’ve mentioned Gilt Groupe a few times and whether an IPO is imminent or an outright sale, this is another great example of an old model (off-price), with a new twist (limited time sales, online only).  The private companies with prominent brands but little presence on the Street cannot be ignored.

Look for more on this topic as we collaborate with Rebecca Runkle to offer her perspective in addition to attempting to identify winners and losers, buyers and sellers, and how the landscape is changing.

 

Eric Levine

 


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more