4 Stocks Vulnerable to Amazon’s Same-Day Delivery
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
At first glance, Amazon’s (NASDAQ: AMZN) recent announcement of same-day shipping seems like a continuation of the company’s sales growth ambitions in the absence of profits.
Same-day shipping will be a process that evolves in coming quarters and won’t be cheap. Amazon continues to build out their distribution platform, along with requiring sales taxes in such states, while making little to no money in the process. The company guided to an operating loss in the third quarter. The stock plunged in after-hours trading, but by the close of markets the next day had surged to post a 7% gain. Why? Because the company has the opportunity to significantly expand into new markets with the addition of same-day shipping. Below are five companies that could suffer as Amazon’s status rises with the addition of same-day shipping and more distribution centers. The impact is likely to be very gradual at first, but one or two of them may very well be the next Best Buy.
Amazon already has a good business selling some tools online, aided by their vast amount of user reviews, but the growth potential in the segment can grow exponentially with the addition of same-day shipping. So let’s say your washer breaks on a Saturday. Most of us would wind up visiting either a Home Depot (NYSE: HD) or Lowe’s (NYSE: LOW) within hours, deal with the large traffic, see expensively priced options, and not really understand which products have good success and which are problems waiting to happen. We would likely fork over the cash and hope everything works out. Instead, imagine being able to go online and see hundreds of reviews along with how-to tutorials, prices 10-20% cheaper (even after taxes and a Prime membership), and then have it delivered within 24-36 hours.
Admittedly, these companies will put up one heck of a fight. Both of them have a great on-line presence already and allow for some small user reviews along with in-store pick-up. And of course there will just be times when you need things immediately and off you go to the store. So it’s likely that these companies will survive, but their stocks may not thrive.
Take Home Depot for instance, its stock has surged more than 75% in the past year. The price-to-earnings ratio is 20, which is one of the highest levels since 2004. The company generates $70 billion in sales annually, so it isn’t going Best Buy’s path, but should it start losing market share to Amazon in big-ticket items, the shares would appear to be poised for underperformance.
Many household items would see their purchase frequency shift from brick and mortar to online. Pet supplies and pet food would be no different. Pet supplies are known to be recession-proof thanks to loyal and caring owners. PetSmart (NASDAQ: PETM), which saw both sales and EPS advance in the tumultuous 2008-2009 period, has reaped the benefits of this perception with a stock valuation at 24x trailing earnings. The valuation has been bid up despite modest growth forecasts because of perceived low volatility in earnings growth.
Amazon does sell pet food and pet supplies already, but a shift toward same-day shipping and a general increase in Prime memberships would really improve their market share in pet food sales. The increase in pet food sales would have cross-over to pet toys and other pet supplies. This could slowly start to eat into PetSmart’s perceived wide economic moat.
The company does offer other key services such as grooming, training, pet hotels, and vet services, but this amounts to just 10% of total sales. The other 90% is pet supplies. PetSmart does benefit from owners actually wanting to go to the store and bring their pets along. This could be a key aspect that keeps sales elevated and helps stave off Amazon and other online retailers trying to encroach on the business. Still, with the valuation priced for continual market share gains, not losses, the stock may be vulnerable at some point in the next couple of years.
Automotive parts are generally another segment of the retail market that requires quick service. Generally, individuals will head to a repair center or a local DIY parts retailer within 24 hours of a problem. If Amazon can get their 24-hour shipping services ingrained in the psyche of individuals, then they may start to encroach on this segment as well.
Shoppers would want to do this because they could read reviews and be more informed. There could even be how-to videos to help DIYers figure out whether they need a simple part for a simple solution, or whether it is a more complicated issue that would require a trained professional. And Amazon could even network with trusted auto repair businesses. Applying Amazon’s retail service reputation to an auto repair shop would clearly be a boon to those businesses.
AutoZone (NYSE: AZO) is one such company that could over time see its market share shrink. The stock has performed admirably of late thanks to a resurgence in same-store sales as consumers with stretched balance sheets opt for repairs over new cars. The 16x price-to-earnings ratio is not egregious, but is at the high-end of the historical range of 12x to 16x. The company has almost 5,000 locations, so growth is very dependent on increasing same-store-sales. If Amazon can slow that trend, then it is likely that earnings expectations will fail to be met.
Amazon and their push to same-day delivery could very well start to encroach on retailers that have some of the better economic moats in the industry. The above mentioned names generally operate in a favorable duopoly or industry structure that is favorable to pricing. An Amazon assault could start to squeeze earnings, if only a little bit at first, and make some of the stocks vulnerable to multiple contraction.
market8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com, PetSmart, and The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.