This week's topics include:
Target's Tidings: Target’s remodels continue to impress while consumables execution continues to depress!
The Consumables Corner: With too many assets chasing too few sales, the in-home consumables retailing industry remains difficult.
Hardline Happenings: Hardline retailers stand to benefit from both ends of the demographic spectrum, in our view.
Walmart's World: The methods for discounting by consumables retailers appear to be multiplying by the week.
A to Z - Amazon Roundup: (1) Instagram is becoming an ecommerce marketplace...one without private label competition; and (2) Amazon pushes further into consumables with another private label brand.
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This week's topics include:
The Department of Industrial Policy & Promotion (DIPP) in India released a draft ecommerce policy on Saturday 2/23. Billed as the “National e-Commerce Policy – India’s Data for India’s Development” – this is separate from the Foreign Direct Investment (FDI) in ecommerce ‘rule update’ that went into effect on Feb 1st, though not entirely unexpected (see our notes on the India ecommerce ‘rule update’ here, here and here for reference).
Indeed, the remodeled store we visited was impressive, having an upscale department store feel in many key areas such as beauty, home and kitchen. Our analysis suggests that Target is likely to continue to benefit from the combination of its remodels, its remake of core categories and the closure of competitors. The challenge, as we see it, is not on the sales side, but rather bringing incremental profits to the bottom line as labor costs jump and omni-channel expense pressure builds.
AMZN reported 4Q18 on Thursday (01/31/19) evening, and the equity fell approximately 5% on Friday amid concerns on slowing sales growth in core retail as well as uncertainty surrounding international growth in India with changing regulations. We see both concerns as overdone and continue to recommend the equity into any weakness. Amazon is now generating cash at unprecedented levels for the company, giving it even more dry powder to invest in its offerings and drive continued market share gains by enhancing the customer value proposition on convenience (faster delivery on more items), expanded Prime content, and potentially taking a move from Walmart’s playbook, being able to make a concentrated investment in price. For India, we continue to view AMZN as better positioned to capture market share gains in the fast-growing market relative to Flipkart (see our note India Ecommerce White Paper – Amazon Advantaged in a Growing, Complex Market). While we are lowering our price target to $2,200 (from $2,350), as we brought some conservatism into our near-term outlook, our view is even more positive on the outlook for Amazon over time and we are strongly reiterating our Outperform rating on the equity.
As we had highlighted in our India Ecommerce White Paper: Amazon Advantaged in a Growing, Complex Market, published on Wednesday afternoon, as well as our related webinar, India’s new ecommerce rule for foreign-owned companies went into effect today. Amazon and Flipkart’s current operating model in India, where certain products are sourced from key suppliers, and then routed through a limited number of affiliated distributors through their respective online marketplaces, is currently not in compliance with the new rule.
Amazon reported its fourth quarter results after the close, generating EBIT of $3.8bn, falling short of our ambitious $4.2bn estimate, but exceeding Consensus of $3.7bn and its guidance of $2.1bn to $3.6bn.
While our study of the India ecommerce market indicates there is plenty of room for two operators, our analysis suggests that Amazon is much better positioned to take advantage of the market’s growth. Indeed, even though AMZN only entered the market in 2013, our projections suggest that its GMV (Gross Merchandise Value) has exceeded Flipkart’s in 2018. Amazon’s business, moreover, creates substantially more gross profit dollars, even when excluding AWS. Amazon is using its very successful North America Prime model, charging a fee, guaranteeing two-day delivery and rolling out services such as Prime Now and Prime Video. For its part, Flipkart does not offer Prime-related perks, nor guaranteed two-day delivery, and creates little gross profit dollars. Finally, Amazon continues to build out significant distribution and logistics infrastructure, and already has fixed fulfillment assets that exceed Flipkart’s. Bringing it all together, our research shows that India is likely to add value to Amazon, but it remains unclear to us whether the same can be said about Flipkart for Walmart.
The calendar may have turned, but the challenges impacting the Food Retail and Food Producers industries remain unchanged. The groups are marred by slow sales growth, higher costs, falling returns and subpar balance sheets. We do not believe 2019 will see any deviation from these difficulties as they appear largely systemic and, as such, we continue to advise investors to underweight Food Retail and Food Producers. In our opinion, while a sharp economic slowdown would clearly hurt if it were to materialize, the Hardlines Retail industry still appears poised to see robust sales growth fueled by a strong consumer, stable margins, and higher ROIC. These companies also have solid balance sheets and a penchant to return cash to shareholders. With valuations reasonable, we continue to suggest investors overweight Hardlines Retail. Finally, the Broadlines Retail industry is seeing sales grow rapidly, in part due to the strength of the economy, but with labor expenses increasing and with the need for omnichannel investments, EBIT growth and better ROIC remain elusive for some. While this causes us to advise market weighting the Broadlines Retail industry, we do believe there are opportunities for outperformance (AMZN, DG) and underperformance (BJ) within the group.
The Indian Ministry of Commerce & Industry’s Department of Industrial Policy & Promotion (DIPP) issued a new ‘Press Note’ on 12/26/2018, “in order to provide clarity to FDI (Foreign Direct Investment) policy on e-commerce sector”, with the update going into effect on February 1, 2019. Worded as a review of the FDI in e-commerce policy, the press note essentially laid out four additional rules.
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