Ama­zon shadow looms large ahead of re­tail earn­ings

WALL STREET WEEKAHEAD

Kuwait Times - - BUSINESS -

As old and new Ama­zon.com com­peti­tors gear up to re­port earn­ings, in­vestors are ea­ger to know how they plan to with­stand the growth of the No 1 on­line re­tailer.

So far this quar­ter, Ama­zon has been brought up in some 130 earn­ings calls from S&P 1500 com­po­nents ac­cord­ing to a Reuters anal­y­sis. About 50 of those came in the last week alone.

More than 30 com­pa­nies re­port­ing earn­ings in the fol­low­ing weeks men­tioned Ama­zon dur­ing their most re­cent earn­ings call or were di­rectly asked about threats or op­por­tu­ni­ties re­gard­ing Ama­zon’s growth. “Any re­tailer, whether it’s an on­line re­tailer or has on­line pres­ence, or just brick and mor­tar, that tells you they’re not con­cerned about Ama­zon, they’re ei­ther in de­nial or ly­ing,” said Steven Osin­ski, mar­ket­ing lec­turer at the Fowler Col­lege of Busi­ness at San Diego State Univer­sity.

Be­yond re­tail­ers like Wal-Mart and Tar­get, and fol­low­ing Ama­zon’s planned ac­qui­si­tion of Whole Foods Mar­ket an­nounced mid-June, ex­pect Ama­zon to pop up on earn­ings calls from food pro­duc­ers, pack­agers and re­tail­ers in­clud­ing Spar­tanNash and Dean Foods. Ama­zon men­tions in less-ex­pected earn­ings calls could also give in­vestors an idea of where an­a­lysts ex­pect the be­he­moth to strike next. “It’ll be in­ter­est­ing to see (Ama­zon CEO Jeff) Be­zos’ next move in terms of want­ing to ex­pand into a cer­tain space,” said Daniel Mor­gan, port­fo­lio man­ager at Synovus Trust in Atlanta.

He said ap­parel as well as phar­ma­ceu­ti­cal dis­tri­bu­tion were among the ar­eas where Ama­zon has been said to make its next big move. “They’ve shown up in places we didn’t think they’d have com­pet­i­tive im­pact just two years ago.” In a sign of Ama­zon’s widen­ing clout, in­dus­try bell­wethers like McDon­ald’s, 3M and John­son & John­son in their lat­est earn­ings calls were asked for the first time about ef­fects of Ama­zon on their busi­nesses.

Not-so-great ex­pec­ta­tions

Con­sumer dis­cre­tionary is the S&P 500 sec­tor ex­pected to post the small­est yearover-year earn­ings growth this re­port­ing quar­ter, with a gain of 3.3 per­cent. Over­all, earn­ings are seen ris­ing 12 per­cent from last year. Ama­zon’s own re­sults weigh on the sec­tor, as it earned 40 cents per share in­stead of the $1.42 an­a­lysts had ex­pected. But its 25 per­cent rev­enue in­crease to $38 bil­lion was seen as a detri­ment to some com­peti­tors and could weigh down ex­pec­ta­tions for their quar­terly re­ports.

“Ex­pec­ta­tions have been pushed down be­cause a lot of the re­tail­ers, par­tic­u­larly the bricks and mor­tar ones, have had prob­lems - Ama­zon and other re­lated - so ex­pec­ta­tions are pretty low,” said Nu­veen As­set Man­age­ment’s chief eq­uity strate­gist, Bob Doll.

“Ama­zon ob­vi­ously has a very pow­er­ful model but on the other hand, they’re not go­ing to put ev­ery bricks and mor­tar re­tailer out of busi­ness. These guys aren’t go­ing to sit and let it hap­pen.”

How­ever, stocks in the sec­tor ap­proach their earn­ings at rel­a­tively rich val­u­a­tions. In­clud­ing Ama­zon, which has an earn­ings mul­ti­ple above 100, in­vestors in con­sumer dis­cre­tionary stocks are pay­ing more than $19 for ev­ery $1 in earn­ings fore­cast over the next 12 months. That is near the high­est since 2009.

As costly as sec­tor stocks are, Ama­zon has kept grow­ing faster than most, up more than 31 per­cent year to date. Ama­zon’s mar­ket cap, near half a tril­lion dol­lars, places it at about 20 per­cent of the S&P 500’s con­sumer dis­cre­tionary sec­tor. Its grow­ing clout has called for com­par­isons with ri­val Wal-Mart, whose growth in the early 2000s raised con­cerns it would put smaller re­tail­ers out of busi­ness.

“In some ways I don’t know if the Ama­zon ef­fect is much dif­fer­ent from what we’ve seen with Wal-Mart or Mi­crosoft,” said Jim Paulsen, chief in­vest­ment strate­gist at The Leuthold Group in Min­neapo­lis.

“There’s fewer and fewer play­ers and more con­cen­tra­tion. It’s the re­sult of win­ner-takes-all sce­nar­ios.” — Reuters

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