Prime Numbers: Brick-and-Mortar Retailers Down but Far From Out?

Is it a fait accompli that Amazon will ultimately reign supreme, driving the rest of the retail sector out of business in the process? Probably not. Malls: Down but Not Out Amid Amazon Disruption
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By many objective measures, Amazon (AMZN) seems to be disrupting a number of established markets across the retail spectrum.  Plus, the company announced a major expansion into brick-and-mortar retailing with the acquisition of Whole Foods (WFM), and last week had record results for their “Prime Day 2017” promotion. Sales increased 60% over last year, with some estimates putting single day sales at almost $2 billion, making it Amazon’s biggest day ever, surpassing the records previously set on Black Friday and Cyber Monday.

But Amazon’s success has come at the expense of many of its competitors in the retail space. Even venerable department stores like Macy’s (M) have been hit hard. The company’s year over year net income has decreased dramatically and earnings per share are down 56% over the last two years. During that same time, their stock price has fallen 71%. But Macy’s isn’t the only company to feel Amazon’s impact.

Rival retailers were hit hard after the Whole Foods announcement, and the threat is seen by many on Wall Street as so serious that there's now a so-called “Death by Amazon” index, which measures the performance of shares of 54 retailers directly affected by the online-retailer’s increasing dominance. On the day the Whole Foods acquisition was announced, according to the Wall Street Journal, the Death-by-Amazon index lost $32 billion in market cap.

But is it a fait accompli that Amazon will ultimately reign supreme, driving the rest of the retail sector out of business in the process? Probably not.

Perception vs. Reality

Once the hype surrounding Prime Day passed and sales numbers were digested, investors voted with their pocketbooks, and if the results are to be believed, the consensus is that there still may be plenty of life in Amazon’s rivals.

On the heels of a Goldman Sachs upgrade, Walmart (WMT) ended the week up over 4%, putting their year-to-date return just north of 10%. Much of Walmart’s resilience in the face of Amazon’s continued growth can be attributed to its own aggressive push into the online space, as e-commerce sales at the retail giant jumped 29% and 63% respectively over the last two quarters. And not only are Walmart’s e-commerce sales growing, but they are driving more traffic into their brick-and-mortar stores.

Target (TGT) also had an impressive week, with their stock jumping 6% after reporting increased sales trends and foot traffic in the first two months of the quarter. If these numbers hold up, TGT could post growth in Q2, ending a multi-year streak of negative comparable sales growth. The takeaway is that strategic initiatives put in place to defend against disruption from the likes of Amazon may be gaining traction.

Potential Headwinds for Amazon

Despite the good news coming out of Prime Day, there is a growing concern from some Wall Street analysts that Amazon’s success could possibly grab the attention of Washington – in the form of antitrust legislation – which by extension could be good for rivals. 

Earlier this year, under pressure from European antitrust regulators, Amazon and Apple (AAPL) ended their exclusivity contract for distribution of audiobooks. Plus, in August of 2016, agents from Japan’s Fair Trade Commission searched the company’s Tokyo offices on suspicion of violating antitrust laws. If U.S. regulators were to target Amazon, it could potentially hurt the company’s business.

In addition, last Thursday, a Wall Street Journal article, citing a recent analysis from Citigroup, asserted that due to quirks in the US Postal Service’s pricing structure, Amazon gets a de facto $1.46 government subsidy per package delivered. Around two-thirds of Amazon’s packages are delivered by the USPS, and if such a subsidy was eliminated, either by legislation or a revision in pricing policy, it could materially impact their cost of shipping.

Nobody knows what the future holds, but last week’s news flow, combined with price action in the retail sector, might convince investors that although Amazon appears to be a dominant force, it may not be the company killer many people expect, and that some of the better-known rivals, though beaten down, may be far from dead.

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