Amazonification

It’s Christmas in July! This week my two teenage daughters were shopping on their iPhones like the other tens of million of people on Prime Day 2017. Amazon’s 2017 Prime Day sales increased 60% over the same period last year and more new members joined Prime on July 11 than on any single day in Amazon history.

Amazon has not only disrupted the retail sector, they are now disrupting the entire economy. According to Bank of America Merrill Lynch strategist Michael Hartnett, “Amazonification” of Main St is killing wages, causing Japan-like deflation. While most of the cable news media continuously pound President Trump, the real story this year has been how Amazon and a few other innovative companies are reshaping our entire economy.

Just a rumor of potentially competing with Amazon can send a company’s stock down sharply. On Monday, Zillow’s stock fell 4% after a “Hire a Relator” link suddenly appeared on Amazon’s website. According to Investopedia, the page, which was later taken down, was reportedly located in the Home and Business Services section, a part of Amazon’s website dedicated to connecting customers with experts in home improvement, electronics installation, and various other services.”

Best Buy also saw its value drop by over 7% Monday when Amazon took aim at launching their own version of Geek Squad. Amazon will be offering their own in-house experts.

The entire retail sector has been in a brutal bear market. It is telling that my two teenage daughters were on their phones shopping, rather than at the mall. The mall stocks have gotten pummeled this year. The loses are staggering. Here is a sample of a few retail names that you are familiar with returns through last Thursday (7/14/17) –

J.C. Penney – Down 40%

Express Inc – Down 39.9%

Macy’s Inc – Down 38%

Abercrombie & Fitch – Down 25%

Urban Outfitters – Down 35%

Foot Locker – Down 31%

GNC Holdings – Down 28%

Kohl’s, Target, American Eagle – All down around 20%

The S&P 500 Retail ETF has fallen more than 10 percent over the past 12 months, compared to the S&P 500’s, 14 percent gains. If there were a S&P 500 Mall ETF, it would probably be down over 20%.

I think of this quote by Sir John Templeton’s when markets go to extremes, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria”.

There couldn’t be more pessimism in the market for retail stocks. Most of these companies are now closing stores and reinvesting back into ecommerce. For instance, Nordstrom’s noted on their last earnings conference call that nearly one-quarter of their sales are from online purchases compared to roughly 5% from 10 years ago.  According to digitalcommerce360, Best Buy’s web sales grew 20.8% for the fiscal year which ended Jan. 28 and totaled $4.85 billion. Best Buy Co. Inc.’s online sales grew at a faster clip than the U.S. e-retail industry average in 2016, and they outperformed online leaders Amazon.com Inc. and Wal-Mart Stores Inc.

This pronounced trend towards ecommerce has been a major reason why the technology sector has been on such a tear. Many companies are now investing in technology for their very survival. I expect that the Amazon effect will push next year’s technology budgets to their limits. I’m spending more time researching for those companies that I believe will benefit from these apparent trends and selectively buying into undervalued companies that can either protect their business from Amazon or successfully differentiate their business from the threat of Amazon.

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