The retail industry is getting hit on all fronts! Who can survive this wave of change?
Amazon (NASDAQ: AMZN), the e-commerce giant, is disrupting the retail business with new ways of shopping. Shopper behavior is shifting from brick & mortar to online browsing. The advances in technology have given players like Amazon a serious push.
Jeff Bezos talks about always looking for innovative ways to grow. He adapts a rather good thinking that it is always Day 1. This is often where all creative thinking exists, the start, the big push and the failures. Day 2 is the decline and therefore the inevitable death. (Source: 2016 letter to shareholders)
Sales and Ca$h
Amazon has over 340,000 employees nowadays. Prior to their IPO they employed 158. From 1996 to 1997, their sales skyrocket from $15 million to $147 million. Today, Net sales have reached $135 billion with their strongest sales period during Q4 where they produce 33% of their sales.
Revenue in millions:
Typically during the 4 th quarter, AMZN reaches their highest level of cash and marketable securities and accounts payable (money owed to debtors and collectors). The first three months of the year or Q1, you will normally see a big decline in cash and accounts payable. The turnover of inventory is quicker than the payment to suppliers. This means, Amazon collects faster than it pays.
The company is carrying in its balance sheet over $25 billion in cash and equivalent. Where are they putting this money to work? They are invested in money market funds, corporate debt, U.S. Government securities, and Foreign Government securities. None of these investments are gaining more than 1.5% interest rate. Recently, they announced the purchase of Whole Foods for $13 billion in cash.
Cash & equivalent in millions yearly growth:
China & India
A major weakness in the e-commerce segment is China and India. These countries have major regulations in Amazon.cn and Amazon.in. The websites are managed by affiliates requiring licenses. China aka People’s Republic of China (PRC) assigns companies to operate www.amazon.cn (IT, data centers, retail, delivery, etc). In the case of India, the country regulates the level of ownership foreign companies’ hold within Indian entities.
Amazon operates 172,000 SQ footage of workplace area, fulfillment and data centers.
Revenue is from items Amazon sells from their inventory as product sales and the net share of revenue from items sold from other sellers. In addition to sold items, the company offers, cloud, storage, credit cards, publishing and advertising among others.
The majority of Amazon’s customers pay with debit or credit card. This form of payment reduces account receivables and allowance for doubtful accounts since payment is automatic passed on to cash.
How does Amazon manage inventory? For units available for sale, the company keeps the FIFO method (first-in first-out) and lower cost or market. For every 1% of additional inventory, Amazon would have recorded $130 million in sales cost.
What is Amazon selling? The biggest slice of pie is among electronics and general products, followed by media. Electronics and others, are increasing at a pace of 20%+ while Media is finding resistance in the International segment.
The major capital expenditure Amazon had is over $500 million in internal software and web development.
Last 19 years of Capital Expenditure information:
Among the sectors established by Amazon (North America, International and AWS), the biggest loser is the International segment. In the past three years at least, they have accumulated a loss of over $2.7 billion. In 2016 -$1,283 million, 2015 -$699 million and 2014 -$640 million. On the other hand, Amazon Web Services (AWS) has increased operating income by 500% since 2014 at $458 million to $3.1 billion in 2016.
Amazon has entered the UPS and FEDEX territory by arranging their own delivery system. This is rather complicated due to the sorting and logistics complexity of door delivery. Today, excluding shipping prices charged by third party sellers, the company is incurring double the cost than the revenue is receiving from shipping activities. In 2016, fees received from Amazon Prime and their shipping services amount to $8.9 billion. The current cost of these earnings increased by over 40% to $16 billion. (Source: 2016 letter to shareholders)
Cost of Sales: there is a noteworthy aspect here where shipping costs associated with merchandise being sent by suppliers are no included right away as an expense but rather put in inventory. The shipping cost is not transfer from the balance sheet until the sales takes place. The delay of this transaction may inflate the value of inventory as an asset when in reality is an expense incurred during the period and should be recorded immediately as such.
Foreign currency impact: Amazon is highly exposed to changes in foreign exchange. The variance can shift by as high as a billion dollar in some cases.
Intangible assets have estimated useful lives between 1-5 years, 1-6 years, and 1-7 years.
Liabilities include unredeemed gift cards. During the years 2015 and 2016, the company had $2 billion and 2.4 billion respectively. A gift card is only recognized as revenue once is redeemed, expires or after two years from issuance.
The table below shows the non-cancelable commitments. These commitments include operating, capital, leases, delivery, fulfillment, data centers and more. Rent expense is shown in operating leases and represented in ascending yearly order, $961 million, $1.1 billion and $1.4 billion.
Finally, the three segments recognized by the company, North America, International and AWS.
North America: this segment contains all sales from amazon.com, amazon.ca and amazon.mx.
North America Revenue and Sales mix:
International: this segment contains all sales from amazon.au, amazon.com.br, amazon.cn, amazon.fr, amazon.de, amazon.in, amazon.co.jp, amazon.nl, amazon.es, and amazon.uk. This also includes all sales to customers in the North America sector.
Amazon Web Services (AWS):
Amazon today has reached a new intra-trading high. The company has never performed a split or paid a dividend. In the past 20 years, it has given their shareholders 14 years of positive returns but like many company, some years it has incurred huge share price declines such as in 2000, losing 81% market cap value. This means that if you would have invested $100,000 in January 1st of 2000, by year-end, your investment was worth $19,000. In the long-term, the company has performed beautifully.
(Source: Yahoo Finance)
The addition of Whole Foods to their portfolio, should provide Amazon with tools and resource for what could be a major reshape of how we shop in a supermarket. Maybe, they will compete with companies such as HelloFresh or BlueApron for food recipe delivery. Perhaps, your groceries will be automatically delivered by analyzing your shopping habits while at the same time, providing you with a credit card service as a payout and membership option.