Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Amazon Moves Closer to Total Retail Domination

Jeff Bezos’ relentless push for total domination of American retail appears to be working. Amazon’s (NASDAQ: AMZN) revenues grew by $6.58 billion during the first quarter of 2017.

The Everything Store started 2017 with $135.99 billion in revenues; and finished the first quarter with $142.57 billion in revenues, the latest earnings numbers indicate. The rate of revenue growth has slowed a little, Amazon added $8 billion in revenues during fourth quarter 2016, but it is still impressive.

There is no reason to think that the Amazon growth is slowing though. Fourth quarter 2016 included the holiday season. Instead like most retailers it seems to have seasonal ups and downs.

Amazon is now the Third Largest Retailer in America

One thing is clear is; Amazon is now the third largest publicly-traded retailer in America in terms of revenue volume after Walmart (NYSE: WMT) and CVS Health (NYSE: CVS).

Walmart reported revenues of $458.87 billion on January 31, 2017, and CVS reported revenues of $177.53 billion on December 31, 2016. Costco Wholesale (NASDAQ: COST) was a distant fourth with revenues of $121.19 billion on February 28, 2017.

Something else is apparent; Amazon has far more momentum than other major retailers. Costco’s revenues only grew by $1.59 billion during the last quarter of 2016. Walmart’s revenues grew by just $1.27 billion in the fourth quarter of 2016.

Amazon has become the biggest player in retailer because it has the momentum nobody else even comes close. Even Kroger (NYSE: KR) which has bucked some retail trends reported that its revenues grew by just $1.45 billion during the last quarter.

Amazon is Now America’s Dominant Retailer

The incredible momentum has made Amazon America’s dominant retailer. It is setting the trends for the industry and effectively dictating some aspects of business practice such as prices and return policy to brick and mortar competitors.

A dominant retailer is the leading merchant of an era, not necessarily the biggest, but the most influential. There have been other dominant retailers at other times; Sears for much of the 20th Century and Walmart in the 1980s and 1990s, for example.

Like Amazon today those brands dominated the popular imagination and the media. They also captured the attention of investors and became Wall Street darlings much like Amazon is today.

Can Amazon Maintain its Momentum?

The $500,000 question here is how long can maintain its momentum? My guess is for at least another decade because there’s plenty of room for expansion left.

A major opportunity is the mass closing of brick and mortar stores known as the retail apocalypse. This aids Amazon by eliminating competition, many Americans have no place to shop but online, if they do not want to drive several hundred miles.

The latest victim of the apocalypse is Tailored Brands (NYSE: TLRD); parent of Men’s Wearhouse and Joseph A. Bank which has closed 233 stores according to CBS. Not coincidently Amazon launched seven in-house clothing lines last year; including Franklin Tailored a line of men’s suits and accessories that competes directly with Tailored, CNN Money reported.

Clothing and Shoe Retailers feel the Amazon effect

So yes, Amazon is not only maintaining its momentum. That momentum is spreading to new industries such as clothing and shoes.

Most of the Amazon clothes sell for less than $100 so they are positioned to capture the middle class shoppers being left high and dry as brands like Tailored, Macy’s (NYSE: M) and JC Penney (NYSE: JCP) shut down locations. It looks as if Amazon is repeating its success in books in clothes.

Clothing retailers that are shutting down brick and mortar operations or closing stores include Rue21, The Limited, Bebe, Wet Seal, American Apparel, Destination XL, Men’s Wearhouse, Joseph A. Bank, The Bon-Ton Stores, JC Penney and Macy’s to name just a few.

The Retail Apocalypse is Driving Amazon’s Momentum

It looks as if Amazon’s foray into the world of clothing is successful and shoes are next. Payless Shoes is planning to close 400 stores and Crocs is closing 160 of its 560 stores.

These mass closures of stores drive Amazon’s momentum by eliminating competition and increasing its sales volumes. Customers sit down at the computer or pick up the tablet because there is no other place to shop.

My prediction is that Amazon’s momentum is about to increase and make the retail apocalypse far worse. A big name retailer that’s likely to join the brands on the death watch is the fashion conscious discounter Target (NYSE: TGT) which saw its revenues drop by $930 million during the last quarter of 2016.

All this will surely raise complaints against Amazon including charges of dumping and monopoly. Dumping occurs when somebody sells merchandise below cost in an effort to run competitors out of business. In the past it was the business model of Sears; which once called itself “The Cheapest Supply House on Earth,” and Walmart which loves to brag about the Walmart Price.

My prediction is that we are likely to see political attacks on Amazon and perhaps attempts by anti-trust regulators to break it up. President Trump floated such a notion during last year’s election.

Surprise Amazon is Making Money

Okay so Amazon’s business model is great at generating momentum and growth but does it make money? The answer is yes.

Amazon reported a net income of $2.582 billion on March 31, 2017. That net income has more than doubled over the past year rising from $1.166 billion in March 2016 to $.2.82 billion in March 2017. The Everything Store is finally making money and even posted a profit margin of 2.03% for the first quarter.

Although some other figures are still bad at the company there was a “free cash flow” of -$3.451 billion which will provide plenty of evidence for dumping allegations. Despite that Amazon is generating a lot of float, it reported assets of $80.97 billion, cash and short term investments of $21.53 billion and $17.01 billion in cash from operations for the first quarter.

Amazon is a Cash Rich Company

The cash at Amazon is growing dramatically. Cash from operations increased by $5.75 billion over the past year; rising from $11.26 billion in March 2016, to $17.01 billion a year later. Amazon’s bank account also grew by $5.67 billion rising from $15.86 billion to $21.53 billion during the same period.

Amazon is a cash rich company, and that should scare every retailer in North America to death. Jeff Bezos now has the money to enter almost any business he wants. Some sectors the Everything Store might tackle next are home improvement, appliances, auto sales, insurance and banking. Areas where Bezos might ramp up his activities are groceries, sporting goods and used merchandise.

The obvious conclusion here is that Amazon’s growth and momentum will continue for the foreseeable future. The disruption and destruction of American retail as we know it is only beginning.

This also means that Amazon’s stock value will continue to grow for at least awhile. Despite that I would advise investors to avoid Amazon stock because it was grossly overpriced at $939.23 a share on May 3, 2017. It also paid no dividend which I definitely did not like.

With this kind of growth, a $1,000 share price for Amazon is a certainty. Amazon is well on its way to achieving both total retail domination and a very high share price.