Is Best Buy (BBY) eating Amazon.com's (AMZN) lunch? Yes, I know, it is way out there in loony land to suggest such a preposterous thing.
Yet, let’s just entertain the thought for a little while and delve into Amazon.com and Best Buy’s earnings reports to see where this takes us.
First, let’s look at the recent earnings
Best Buy shows net earnings of $1.18 billion in the trailing twelve months. In the last quarter these earnings were contracting at a 30.3% clip year on year, and are expected to contract further in the next – most important – quarter, at a 7.4% clip. Estimates for 2012 earnings have also come down slightly in the last 90 days, by 3.2% (from a $3.72 EPS down to a $3.60 EPS).
Amazon.com shows net earnings of $0.87 billion in the trailing twelve months, thus less than BBY’s. These earnings are also contracting much faster than BBY’s, having fallen 72.3% in the last quarter (year on year), and being expected to implode 74.7% in Q4, the most important quarter. Also, estimates for 2012 have been slashed by 36.7% in the last 90 days (from a $3.27 EPS down to a $2.07 EPS).
So, the earnings paint a picture of lower earnings for Amazon.com, and earnings falling much faster for Amazon.com. It can hardly be said that Best Buy is the one suffering the most right now. Although this fall in Amazon.com earnings is being attributed to ongoing investment, there are legitimate doubts about that theory, namely because the costs driving margins lower are in many cases variable, and tied to well-known trends like higher oil prices, the change in mix toward EGM (Electronics and General Merchandise) and the change in mix toward third-party sales.
What about the costs, how do they compare?
The popular wisdom holds that Amazon.com, not having to have big box stores everywhere, runs a much lighter and less costly retail model. But is that what the numbers tell us? Actually, there are legitimate doubts about that as well.
In the last 9 months, Amazon’s operating costs other than costs of goods sold came to 21.49% of revenue.
At Best Buy, in the last 6 months, it was 22.71%, a little higher, but not completely out of whack. Amazon.com might win some in not having to maintain stores and associated personnel, but then again customers don’t really factor their costs in going to the store, yet they do factor delivery if they have to pay it, so Amazon.com ends up eating that cost, which doesn’t exist in physical stores. Also, AMZN’s tech costs are much higher, and Best Buy’s physical presence works as free marketing.
We can also compare this cost structure to Wal-Mart’s (WMT). Wal-Mart's comparable operating costs (below cost of goods) are 19.50% of revenue in the last 6 months. Wal-Mart might well be running a more efficient retail model right now.
Then there are sales taxes
One should also bear in mind that the above comparisons are happening before important States, like California, require Amazon.com to collect sales taxes. Although sales taxes will not change Amazon.com costs much, they will mean either higher retail prices and lower revenue or lower margins (if Amazon.com eats part of the implicit price increase). Regarding this, I’d recommend reading Abe Garver’s latest article, “Abrupt End To Tax-Free Internet Shopping Predicted: Significant Impact On Valuations.”
Conclusion
Although by no means final, this article suggests that even before the advent of sales tax collection, the competitive position between Amazon.com and some bricks and mortar retailers, like Best Buy or Wal-Mart, is not so obvious as popular wisdom would have you believe.
There are good, solid, reasons to question such wisdom. Yet the stocks trade as if there was total certainty that Best Buy is a loser, and Amazon.com is a winner.
This entrenched idea might come from the failures of competitors like Borders and Circuit City, and the difficult position Barnes & Noble (BKS) finds itself in (even if the Nook tablet seems technically competitive with the Kindle fire). Yet, at least for now Best Buy’s P&L is still not consistent with such a story; indeed, Amazon.com now seems in a weaker competitive position than it ever was (even ignoring the loss of the digital market - except books - to the likes of Apple (AAPL), Google (GOOG), Pandora (P), Netflix (NFLX), etc.
Disclosure: I am short AMZN.
