Amazon’s private label brands are an important piece of its retail strategy. In last week’s A to Z, The Kraken, we analyzed the various ways Amazon generates fee income and how it is a significant competitive advantage, helping to expand services and support profitability, and this week we are looking at private label. We searched Amazon’s “Our Brands” and found that the company has around 7,000 SKUs of private label items across categories and an additional 1,400 SKUs under the Whole Food’s Everyday 365 brand. Most of the private label brands owned by Amazon are in women’s and men’s apparel (we estimate about 46% of SKUs belong to private label apparel brands). AmazonBasics offers a private label option across multiple categories, and we estimate has over 1,000 SKUs available in categories such as electronics, office supplies, automotive, and pet supplies.
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This morning (06/06/18), CVS announced the plan for management positions following the close of the merger with AET. Jon Roberts will continue to serve as EVP and COO with oversight of CVS Pharmacy, CVS Caremark, and Omnicare. Karen Lynch (President of Aetna) will serve as EVP and President for the Aetna unit. Importantly, AET’s CFO, Shawn Guertin, will become CFO of the combined entity, and CVS’s CFO David Denton has elected to depart following the transaction close.
On Friday (05/11/18), President Trump, in conjunction with the Department of Health and Human Services, outlined a plan to address the cost of pharmaceuticals in the U.S. The plan centered on four main strategies, including more competition, improved negotiation, incentives for reduced list prices, and lower out-of-pocket costs for drugs. The emphasis of the plan appears to be reducing prices and simplifying the industry structure. Following the Administration’s presentation of its proposal, CVS Health issued a statement which appeared to support the Administration’s goals.
CVS reported better-than-expected 1Q18 earnings Wednesday morning (05/02/18) and reiterated its profit growth outlook for the year. The bigger topic at hand, we believe, is what the drugstore industry will look like in the future, and much has yet to be determined. CVS is embarking on a somewhat uncharted path to remake itself and the consumer health experience by merging with Aetna. Will CVS/AET drive the same success CVS/Caremark did flexing the vertical model… will there be health plan client friction… what will the drug coverage model look like down the road… will Amazon enter? We believe there are many unanswered questions which are conspiring to hold back the equity, and could continue to do so until more clarity emerges. Balancing CVS’ strong management team and low valuation with these unanswered questions/ concerns, we remain Peer Perform rated.
The flurry of anti-Amazon tweets and claims criticizing AMZN’s relationship with the U.S. Postal service, in our opinion, are responsible for the share pressure on AMZN. With media reporting that sources are not aware of any discussions to take actions and increase regulation against AMZN, the selloff appears overblown, in our opinion. We continue to view regulation and government intervention as one of the largest risks to AMZN, however, we find it difficult to make the claim that AMZN today holds monopolistic power in the sectors that it competes. Nevertheless, we do not see how Jeff Bezos’ ownership position in the Washington Post is good for Amazon shareholders.
Walgreens reported better-than-expected earnings yesterday morning and raised its outlook, due in large part to changes in U.S. corporate tax law. The stronger bottom-line results, however, are being obfuscated by what we believe is a broader issue around the future role the drugstore will play in consumers’ lives. The front-end continues to see negative same store sales trends as consumers shop for these products online or at cheaper brick & mortar retail venues. But the real challenge appears to be in pharmacy dispensing where we believe Amazon is likely to enter the market and take share, and address inefficiencies that exist today because of the high-cost real estate and labor model of the drugstore. Both CVS and Walgreens seem to understand this, and are likely to try and remake the drugstore experience over the next several years.
CVS reported 4Q17 results this morning, before the market opened, which came in slightly better than expectations. While little additional detail around its pending merger with Aetna was provided, the company is using the cash benefit associated with the tax change to both invest back in the business and reduce leverage. Net, these investments are lowering the profit growth algorithm in FY18. As we have noted before, CVS is embarking on a somewhat unchartered path to remake itself and the consumer health experience by merging with Aetna. Balancing a great management team and a valuation well-below averages with potential loss of health care plan clients and a possible Amazon entrance into the industry, we remain Peer Perform rated on CVS’ equity.
This morning (01/30/2018), Amazon, Berkshire Hathaway, and JPMorgan Chase announced a partnership to create a new independent company with the goal of utilizing technology solutions to reduce healthcare cost for their employees. The effort announced today appears to be in the early stages of planning, but will be led by executives from the three companies, Todd Combs from Berkshire Hathaway, Marvelle Sullivan Berchtold from JPMorgan Chase, and Beth Galetti from Amazon. Additional details are likely to unfold over time.
We have taken a closer look at Instacart, the online platform that delivers groceries by connecting customers to local personal shoppers. The company now services over 4,000 cities, which we calculate accounts for approximately 43-47% of the total U.S. population. By offering home delivery through “pickers”, Instacart allows brick and mortar locations to leverage their assets and provide same-day home delivery for a competitive price. The list of Staples Retailers partnering with Instacart continues to grow and includes large retailers such as Kroger, Costco and CVS.
Our recent research shows that the company is experiencing significant stocking issues at both its acquired Whole Foods stores, as well as with its Amazon Fresh operations, is struggling to reduce the high prices at Whole Foods, and is lacking a full fresh offering, particularly lower priced fast-turning private label items like milk and eggs at Amazon Fresh. In our opinion, if these issues persist they could tarnish the Amazon and Whole Foods brands, and hurt the revenue growth prospects of AMZN. Amazon, in our opinion, needs to move aggressively to fix these execution issues and to develop a comprehensive strategic plan for its consumables business. Always a worry and never yet reality, we do wonder if the company is over extending itself.
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