(Someday, the entire process of living in New York City's Lower East Side will be automated by software instead of Madison Avenue/counterculture cycles. - Wikipedia)
Thought experiment time: Amazon has a store with no checkout. How much is the related cost savings worth to a business like Whole Foods? SG&A for 2016 was $4.54 billion. How much of that was employee compensation? Here's a CBS News report giving us a clue:
It helps that Whole Foods' employees are better paid than the average grocery worker. The chain's average hourly wage was $18.89 in 2013, and the average annual wage was $39,289. All full-time and part-time workers can get stock options after they have worked for the equivalent of three full-time years.
Wikipedia list Whole Foods' employee count at 91,000. How many of those are cashiers do you think? Let's say it's 1 in 20 (total guess). That's 4,550 cashiers. To include benefits, let's multiply a rounded salary of $40,000 by 1.2 to get $48,000. Multiplied by 4,550 cashiers, that's $218 million in SG&A expense savings if Amazon is able to eliminate those positions. $218 million more travels to the pretax income line then is taxed at 38%, that's an addition of $135.2 million in net income, or a 27% increase.
That's operating leverage for you. At 5.2% operating margin and 2.5% net margin, even a tiny reduction in expenses can have big valuation implications. This sets aside, of course, any brand image issues associated with the mass workforce reductions at a company that brands itself as socially responsible.
Coincidentally I would think Amazon was willing to pay about a 27% premium to the previous close price of $33.
All of that is very broadly sketched and back of the envelope. But doesn't it seem interesting that the market has now assigned a premium over Amazon's buyout offer even though Amazon has a towering advantage in technological synergy over any other potential acquirer?
In other words, what buyer could make better use of Whole Foods than Amazon, and therefore be willing to pay more for the company than Amazon is?
See also: Big-cap Tech Leads Markets Higher
(Let's stick with the New York City theme. Time Warner Center. - Wikipedia)
- Snap (NYSE:SNAP) +2.7% on Time Warner (NYSE:TWX) show development deal: Time Warner appears to be contracting with Snap, Inc. for 10 shows at $10 million per show. Snap would keep half the ad revenue from the shows. To put that $100 million number in perspective, it's about 4.5% of SNAP's loss in the *first quarter* of this year.
- Goldman's picks for a low volatility world: Go for high Sharpe ratios if volatility is expected to remain low, says Goldman, which is interesting, since Sharpe ratios privilege stocks that provide greater volatility adjusted returns. If you assume volatility is going to be low, why not just go for high returns, period? Something to read up on later.
- Couple IPOs rumored, possible, or happening: Jaguar Land Rover IPO could be in the works; Report: Maersk (OTCPK:AMKBY) will only list oil business.
- Brexit talks underway in Brussels: Seems downright quaint now that the market had such a tough time stomaching Brexit when the vote came in.
- Helene Meisler (@hmeisler) conveys relief that the VIX sold off into the bell amid an up day for stocks.
- Adam Singer (@AdamSinger) sets of a mattress pun chain reaction amid I.P.O. news for bed startup Casper.
- Charlie Bilello (@charliebilello) considers whether the market is always right.
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