AMZN validated 2 calls last night. 1) The ‘I have to own this mega-growth or I get fired’ call. And the 2) “this company is stepping on the spending accelerator so hard and will never print a dime” call. I like the ‘biggest retail/consumer rollup in history’ call. And I think a better way to play it is Long WalMart.
Two big picture points hit me immediately on the AMZN print (the same one that will have 50 research notes clogging inboxes this morning) relate to 1) The Amazon Stock Call, and 2) The Everything that Touches AMZN on the Fringes’ call.
- AMZN Call: The ‘I’ll get fired if I don’t own this, and won’t get fired if I’m long and wrong’ sentiment is scary. But organic growth accelerated for the second straight quarter before the WFM deal is even booked. Likelihood of the ‘doomsday scenario’ (ie integrate the biggest deal of the year while sales slow organically) just partially evaporated. You can drive a truck through guidance…as usual. I’m long this, and yes, I’m gravely concerned for when growth slows to the high teens. But with credit card tailwind, ‘sub-Prime Prime’ acquisitions, and Fresh getting closer to a critical adoption point…McLean is modeling mid-20s growth until well into 2018.
- The ‘Everything Else’ Call. The interesting callout here – in light of obvious absence of category commentary – is that SG&A is finding a ‘new normal’ at an elevated rate. That’s AMZN Mgn Bearish, and ‘Anyone who competes on the fringe’ bearish. This investment is partially in fulfillment, which is critical -- as falling down there is one of the few things that could sink this story). But the other part of SG&A was video content (ie putting more in the Prime box so people ditch their cable bill, Spotify subscription, and ultimately use Prime to buy more eggs, light bulbs and PJs). This has been happening, as we all know, but looks like it’s accelerating.
My take on this beast is that Amazon is evolving into the biggest consumer brand roll-up in the history of modern business.
- Every relevant consumer brand with even a mediocre strat plan will sell direct on AMZN in a ‘virtual mall’.
- Synchs w tangential consumer services/needs in order to put more value in the box for Prime – which is 100% of retail EBIT. (think warehouse club model on steroids).
- This is like what Alibaba did w t-mall…but Amazon will be far better and more far-reaching. (and Alibaba has 10x annual transactions vs Amazon = #bigoppty)
- People talk too much about ‘getting amazoned’. That’s a monkey consensus call. The new trend is ‘Amazoning’ – and if consumer brands don’t respect and align with that concept…then they’re going to (unintentionally) lever-up and go punk.
There’s far more Long opportunities out there than people think. People are starting to ‘get it’. Those that can’t see past their nose hairs (including CEOs of about 100 retailers), are gonna lose faster than consensus estimates suggest. Winners will win faster than people think.
The better way to play Amazon (esp on a risk-adjusted basis) is to Long WalMart. WMT needs online, and AMZN needs stores. Yes, AMZN just bought 30mm square feet of space w WFM, but the reality is that WMT has been acquiring an e-comm infrastructure for the better part of 2 years. Jet, hayneedle, Modcloth, Moosejaw, bonobos…these are all businesses to diversify away from food (in part) and build new consumer-centric platforms.
Yah McGough, I know, but they’re too small to matter… I get that, but remember when Nike bought Hurley 15 years ago? It did that to ‘learn’ the surf/skate space. How many times do we hear CEO’s say that? Yah…but Nike actually did it, and now sells 20x the Nike-branded skate shoes as it does Hurley. Not many other companies are good at learning a new consumer, market and/or platform. I would not – for a minute – bank on McMillon falling down on this at WMT.
-- Brian McGough
Some deets on the quarter from McLean
- Amazon beat revenue by 2%, accelerating 220bps from last Q and accelerating 260bps on the 2yr average.
- Share gain and revenue performance for the company is still astounding.
- Amazon accounted for about 32% of US Retail growth (ex Gas & Auto) in 2Q.
- Growth was driven by accelerated NA retail, which contributed 60% of incremental revenue.
- International retail and AWS each added about 20% of growth.
- NA retail saw a 310bps acceleration in growth, international saw 100bps acceleration in C$, and AWS growth slowed 60bps likely impacted by incremental price reductions.
- Gross margins beat by 20bps, but EBIT margin weakness this quarter – yet again -- was from accelerated investment, particularly in fulfillment and video content.
- Management noted that fulfillment square footage was up 30% last year, with most coming on in the back half.
- This was a drag on retail margins with NA margins down 202bps, and International margins down 493bps.
- The company also signaled increased hiring as a drag, specifically in software engineers in support of AWS (AWS margins were down 254bps as well), and sales people for advertising.
- EPS missed by 71%, but the miss was somewhat deceiving.
- EPS was hit about 30% was from abnormally high tax rate, and the rest came from higher SG&A investment, EBIT fell easily within mangagment’s large guidance range.
Looking ahead…
The part of the P&L we think can underperform both near term and long term is margins.
- While consensus seems to think Amazon will open up margins starting now, in reality investment is accelerating in several areas (Distribution, Content, Tech, and Marketing).
- The most under appreciated may be US distribution center square footage.
- So far in 2017, the new announced distribution center square footage is 47% greater than what was announced at this time last year.
- Let's not forgot the DC square footage to be acquired through WFM, the stores account for 18mm SQFT, with the total company adding 20-30% DC square footage growth in the US for AMZN.
- Simply put, the distribution network is still far from where Amazon wants it to be. Given the continued investment, we think the street is overly bullish on the amount of margin expansion that Amazon management will release in the next few years.
- We are more bullish than consensus on revenue, but we are bullish on the companies appetite to invest as well, and the time Amazon unlocks margins is still well down the road.
– Jeremy McLean
