Black Friday: Amazon Stock Takes Larger Bite out of Shrinking Pie (AMZN)

The preliminary results from Black Friday are in, and depending upon whom you ask, holiday shopping sales figures are a mixed blessing.

Black Friday: Amazon Stock Takes Larger Bite out of Shrinking Pie (AMZN)
Source: Amazon

Crowds for Black Friday were noticeably thinner at brick-and-mortar retailers, likely a byproduct of sluggish economic conditions, the relative lack of competitive offerings and changes in consumer behavior. The latter was exacerbated — or encouraged — by online sales during the early hours of Black Friday, which had jumped 15% from 2014.

Great news indeed for e-commerce giant Amazon (AMZN), but U.S. retailers may eventually suffer the consequences of a painful bifurcation.

The impact is most obvious in the financial markets. The benchmark retailers exchange-traded fund SPDR S&P Retail ETF (XRT) dropped sharply on the session immediately following Black Friday, closing down 2% and further burdening its year-to-date loss.

Big box retailers Walmart (WMT) and Target (TGT) also languished in lackluster trading, with both shedding more than 1%. Amazon stock, which did not escape Monday’s volatility, is nevertheless up an astounding 115% YTD. To put this into perspective, AMZN’s annual return so far is more than eight times greater than that of Costco (COST) — one of few major retailers that are positive for 2015.

Of course, none of AMZN’s competitors are going down without a fight. Logically, e-commerce represents another channel by which retailers can attract potential customers, and Target in particular has pushed its online division aggressively, offering free shipping throughout the holidays. The results were encouraging — simultaneously topping last year’s sales and breaking all-time records.

However,’s performance is still below expectations and only represents roughly 3% of its total business. And on Cyber Monday — the online equivalent of Black Friday — heavy traffic temporarily crashed its website, suggesting much work to be done to compete effectively against AMZN.

Although consumer behavior is clearly shifting towards e-commerce, the direction of U.S. retailers as a whole remains muddy. True, Amazon stock has enjoyed several years of outperformance both in the equity markets and at the cash register, but the present health of the economy has dampened future revenue forecasts for all involved.

According to information provided by the National Retail Federation, total retail sales growth is expected to decline against last year’s rate. Additionally, retail growth post the financial crisis has been well below the peak years of 2004 and 2005.

The slow erosion of consumer sentiment is alarming, but especially so for Amazon stockholders. More than 103 million people eschewed waiting in Black Friday lines for the convenience of online shopping during the most recent four-day weekend, compared to 102 million who ventured on foot.

Bullish for Amazon stock? Absolutely, but only in a very short-term sense. Without aggregate revenue growth among U.S. retailers, AMZN is merely cannibalizing sales.

AMZN stock, revenue
Source: Source: JYE Financial, unless otherwise indicated

The devil is in the details. Since 2011, combined sales growth for WMT, TGT and AMZN have largely been in decline, dropping from a high of 8% to a present low of 1.7%. Big box retailers have taken the brunt of the damage, and as a result, AMZN has accounted for an increasing share of the market. But the only thing that is happening here is the consumption of a shrinking pie.

While arguably most Wall Street analysts will posit a “buy” recommendation for Amazon stock based on its historical performance and dominance in the e-commerce sphere, there are steep challenges ahead.

One oft-cited concern is profitability, with Amazon stock’s per-share earnings trend demonstrating few signs of stability. This has contributed to AMZN being priced into the stratosphere relative to trailing earnings, and even against forecasted earnings, the online retailer can hardly be considered a smoking deal.

That hasn’t stopped Amazon stock from being a perennial Wall Street darling, but that could quickly change due to one factor — desperation. With so much at stake for the retail industry, many competitors have pushed their holiday promotions beyond the singular scope of Black Friday. That could easily cut into AMZN’s sales, forcing the company to respond with even more margin-pressuring incentives.

As the retailers may view this year’s Black Friday results, one’s good news is another’s bad news. Although e-commerce companies were buoyed by a sharp rise in online sales, the shift in consumer sentiment has negative implications for traditional brick-and-mortar stores.

But due to the current state of the economy, overall sales growth has been relatively tepid, presenting serious questions regarding the future direction of Amazon stock.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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