Black Friday’s Online Retail Winner

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According to comScore estimates, online retail sales topped $1 billion on Black Friday for the first time this year, an increase of 26% over last year. So far online retail sales have grown 16% year over year and comScore estimates sales to continue to grow around 17% year over year for the Holiday season. Online sales this holiday season are expected to grow at a faster rate than they have since the fourth quarter of 2007. Despite the high growth rate, online sales are estimated to account for roughly 9-10% of all sales this holiday season, leaving plenty of room for growth from online retailers.

Black Friday’s big winner online was Amazon.com ), the most visited online retailer of the day with more than 28 million visitors. Amazon’s traffic increased 18% over last year, outgrowing their biggest online retail competitors: Wal-Mart ), Best Buy ), and Target ). Wal-Mart’s second place finish in visitors was far behind with 18.4 million online shoppers.

Margins in Focus

Amazon.com has become the online equivalent of a big box retailer selling everything from books and electronics to wine and pet supplies. Many of Amazon’s products such as the Kindle and Kindle Fire are sold at razor thin margins or even at a loss. So while revenue rose by 41% in 2011, operating income, net income, and earnings per share all fell due to low prices and increased expense. Out of the four companies, Amazon had the lowest margins last fiscal year.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Gross Profit Margin</p> <p>(Last Fiscal Year)</p> </td> <td> <p>Operating Profit Margin</p> <p>(Last Fiscal Year)</p> </td> </tr> <tr> <td> <p>Amazon</p> </td> <td> <p>22.4%</p> </td> <td> <p>1.8%</p> </td> </tr> <tr> <td> <p>Best Buy</p> </td> <td> <p>24.8%</p> </td> <td> <p>2.1%</p> </td> </tr> <tr> <td> <p>Target</p> </td> <td> <p>30.9%</p> </td> <td> <p>7.6%</p> </td> </tr> <tr> <td> <p><span><span>Wal</span>-Mart</span></p> </td> <td> <p>25.0%</p> </td> <td> <p>5.9%</p> </td> </tr> </tbody> </table>

Many Amazon investors will be quick to point out that Amazon is investing for the long term. Relief may be on the horizon for Amazon investors as gross margins expanded to 25.3% last quarter from 23.5% the year before. However, management continues to increase operating cost and invest in the future. CEO Jeff Bezos has a vision for market leadership, as stated in his letter to shareholders in 1997. That letter is reprinted in every annual report, as their goal has remained the same over the years. Jeff Bezos reminded investors of Amazon’s approach “to work hard to charge less,” during their latest earnings announcement. 

Looking Forward

Amazon was the clear winner in Black Friday online traffic, as more consumers logged in to find bargains from the comfort of their home. However, Amazon’s stock is not in the bargain bin, trading at 342 times 2012’s expected earnings. Amazon investors should be looking for margins to improve further in the upcoming quarters. This could be aided as Amazon sells more digital content such as Kindle books and digital movies. ComScore shows the digital content and online subscription group out pacing the market, growing at 29% so far this holiday season. Amazon will be a great long-term buy if they can continue to grow revenue at 35% a year and if margins expand.  


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