Amazon.com, Inc. (NASDAQ:AMZN) shocked the world when it bought Whole Foods Market, Inc. (NASDAQ:WFM) recently. We’ve heard about how and why this acquisition occurred, and there is a general consensus that it was a stroke of brilliance by Amazon. This naturally leads to a question of what the company will purchase next.
For that, we look to the synergies that Amazon and Whole Foods have with each other. I think the biggest factor is that Amazon instantly has a larger footprint from which to deliver Amazon Fresh items, and to do so from the arguable brand leader in organics.
Because Amazon Fresh hasn’t been a success, this seems like a move to try and create a hybrid retailer — one that that combines the technological advances of AMZN with the brick-and-mortar model by some brand winners.
I think Amazon realized that for certain areas, such as groceries, this hybrid model is the way things are going to work. The company is still learning how its own technology and logistics can grow, and how it is really creating more of a retailing ecosystem than anything else.
What’s the Next Target for AMZN?
So what else might fit into this model? One thought I have is one of the big dollar store chains, like Dollar Tree, Inc. (NASDAQ:DLTR). With over 14,000 locations, there is a sizable footprint for Amazon to ship dirt cheap items out of. As it stands, Amazon probably makes next to no margin on things it sells for a dollar, while DLTR has net margins over 4%. The market cap is $16 billion, so it isn’t that much more expensive. Alternatively, it could buy 99 Cent Stores from Ares Capital, which is in the midst of creating new efficiencies in the stores.
In other words, AMZN can instantly add a lot of infrastructure to its operation on low-margin items, giving it direct access to consumers in an area where it really can’t compete.
I also think Amazon would love to get into the pharmacy business somehow, which is constantly in flux, and for which there are frequent acquisitions and sales. How about CVS Health Corp (NYSE:CVS) and its Caremark pharmacy service? What about Express Scripts Holding Company (NASDAQ:ESRX)?
Now, a closer look at how Bezos operates with acquisitions yields some interesting patterns. Drugstore.com, The Washington Post and Whole Foods were all in some kind of trouble financially. In other words, he’s acting more like Carl Icahn, except instead of buying up shares of distressed assets and raising a proxy ruckus, he just buys the whole darn company.
Bottom Line on Amazon
So instead, look to companies in the same position. What about Sears Holdings Corp (NASDAQ:SHLD)? Oh, yes. Here we have a dying retailer, but one that has almost 2,200 stores across the Sears and Kmart brands, and they exist all over the country. Not only that, 450 Kmart stores have in-store pharmacies!
Sears also has almost 600 Auto Centers. These are high-margin businesses, catering to a low-to-middle income clientele, with ancient computer interfaces that would benefit drastically from an AMZN upgrade — upgrades that would include access to cheaper parts from Amazon’s own stock.
SHLD may be dying, but it still is the top provider of appliance and product repair services, and its 10-K says it has active relationships with 35 million households. That seems very high to me, but even 10 million is incredible. Amazon would also get famous brands like Kenmore, DieHard, Covington, Roebuck and Simply Styled. All this provides a jump start to Amazon Home Services — another area where Amazon could supplant the highly fractured world of handyman services.
AMZN would greatly improve efficiency at Sears and transform the business, while integrating it into its ecosystem. I’m banking on this acquisition as being Amazon’s next big splash.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
