AMZN - $15 in Earnings???
It's tough to say that this was a 'great' quarter for AMZN, as the company still lost money despite adding $3bn in revenue and improving gross margins by 340bp. But relative to expectations, it was killer. Specifically, EBIT came in at $255mm, which compares to guidance of -$450mm to +$50mm. That's particularly impressive given that the international business posted a 1600bp hit in reported sales growth due to FX -- the biggest hit ever for AMZN.
When all is said and done, we think that the AMZN debate is finally getting interesting. It's been a stock that trades at a stratospheric multiple of earnings (about 370x today), but invests and competes away its profit/earnings to gain share. By our math, today AMZN accounts for about 15% of all online spending. At some point sales growth will slow, share will find its final resting place, and AMZN will blow-out its margins. That's when we see the real earnings power of the company. Looked at a different way, Wal-Mart accounts for about 7% of Brick & Mortar US Retail Sales. Based on that metaphor, one could make the argument that AMZN is twice as dominant in its core market as WMT is.
The bull case as we see it is that AMZN tops out at 20-22% of Online Retail Sales over 3-4 years, and takes margins up to 6% -- something that's well within reason. This year the company will earn something South of a buck. But a 6% margin in 2018 would result in EPS of about $15. That's about 25x earnings based on today's price. Not bad for one of the most dominant companies to ever do business on this planet.
This name is officially back on our Idea Bench as a Long.
KSS - Kohl's and Gaiam Launch Yoga Line in NYC
Takeaway: KSS pulled out all the stops yesterday to launch it's new Yoga line with Gaiam and Two Fit Moms in NYC. The ironic part of the marketing equation is that KSS doesn't have a store in Manhattan proper. Yes, this will probably get picked up by national media and there was a social media campaign behind the event, but we'd think that KSS would leverage an event like this into building awareness and goodwill with people who actually shop at the store. As far as the Yoga play is concerned - nearly every retailer out there has some answer to the 'athleisure' trend. TGT has champion, DKS added Calia with Carrie Underwood this year, Victoria Secret and Gap have done it in house. At this point, it's not a differentiator unless the brand is a leader in the space. Gaiam has been a player in the equipment space mostly in the mid-tier mass space, but has very little exposure to the apparel side of the Yoga/Athletic market. It may keep some KSS shoppers in house, but we don’t see how it’s a major traffic driver for the company.
HBI - Numbers Fine. Outlook Cloudy. We'd Avoid it.
We wouldn't own HBI here, and our sense is that the management team wouldn't disagree given the wave of insider selling we've seen in recent weeks, To buy the stock at 15.5x EBITDA, you need to believe that the company is sandbagging on accretion from its deals and that real numbers are considerably higher. We're not making that bet until Rich Noll does, especially with the SIGMA reading going the wrong way.
The organic growth rate was -3.3% excluding the $184mm from DB Apparel. There were a few puts and takes on the top line in the quarter, but the most notable was that one of the company’s big accounts drew down its inventory position. It's likely Wal-Mart or Target -- with our bet on WMT. The reality is that WMT took up wages 25% above minimum wage and it has to pay for this somehow. TGT took up wages to a lesser degree, and will certainly look for vendors to shoulder the cost given that consumers won't.
Management selling an expensive stock while at least one major customer 'adjusts inventory levels' = a pretty big deflator to the best bull thesis.
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