Taxes, Wal-Mart, And Distribution Centers: Amazon Trying To Overcome Barriers

| About:, Inc. (AMZN)
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There have recently been some major changes with Amazon (AMZN), and these do seem to be causes for concern. Wal-Mart (WMT) has decided to stop selling Amazon's Kindle, which will logically have a negative effect on Kindle sales. In addition, the state of California is yet another state that has begun collecting sales tax from Amazon and other online retailers, reducing the price advantage for online retailers. Amazon is attempting to use this as a chance to gain a new edge. It is building new distribution centers and pushing for better shipping times, hoping to eventually allow for same-day shipping. Clearly, Amazon is changing, but will it be enough? I think Amazon is trying to make the best of a bad situation, but it is still a bad situation. Even though it will continue to play a major role in the retail industry, I don't see Amazon continuing to post as healthy numbers as investors have come to expect until it's able to finish responding to these changes.

Wal-Mart has become the second major retailer to drop the Kindle from its line, as Target (TGT) has already pulled Kindle products from its stores. One explanation for this is clearly that Amazon is a major competitor in the retail industry. Some have suggested that Wal-Mart actually dropped Amazon's Kindle because it was not selling well. Wal-Mart is still carrying products from Apple (AAPL), Barnes & Noble (BKS), and many others though. Even if Wal-Mart was selling "less than one [Kindle Fire] device per store per day," I find it hard to believe that Nooks have been more successful. Looking purely at sales is too simplistic. The decision probably dealt with sales, competition, and a number of other factors as well. Wal-Mart was not making enough money to justify the help it was giving to Amazon - a major retail competitor - so it dropped Amazon's products from its stores.

While this clearly hurts Amazon's sales of Kindle products, it could hurt other Amazon sales as well. Although ads have caused disapproval from some Kindle owners, most ads on the Kindle promote other Amazon products. Amazon's tablet sales, therefore, are linked to other aspects of Amazon's retail business. Decreased Kindle sales could also have a negative effect on Amazon sales in a more general way.

Even worse for Amazon is the fact that the state of California is forcing online retailers to collect sales tax from customers, raising Amazon prices anywhere from 7.25% to 9.25% in that state. This has led some to speculate that Amazon could respond by expanding its AmazonFresh grocery delivery service. Even if this did happen, however, it would be a slow change due to the limited success of online grocery services in the past. Therefore, I would not put much stock in the impact that AmazonFresh will have on Amazon during this time of major change.

A more significant and definite response to the situation is that Amazon will be building new distribution centers in California and other states in an attempt to reach same-day shipping possibilities. Clearly, customers would love same-day shipping, as this removes one more gap between online shopping and shopping at brick-and-mortar stores like Wal-Mart and Target. This could help further explain why Wal-Mart and Target have dropped the Kindle from their stores, as online retailers are continuing to gain new advantages. Fast shipping seems like it would be less important than low prices though, especially since there is already a one-day shipping option for Amazon customers that will pay more. This change is not cheap for Amazon either, as it is "investing so heavily in the warehouses that it is barely profitable." I do not think this is too risky of an investment for the company, as it will definitely bring positive results. However, I also doubt this will make up for the loss in price advantage.

Wal-Mart is trading around the high price of $74. It has revenue (NYSE:TTM) of $460.71 billion, and its revenue growth is 4.51%. Target is trading around $65, has revenue of $71.34 billion, and has revenue growth of 3.32%. I expect these companies to fare well as online retailers begin charging sales taxes in various states like California. Wal-Mart, especially, has a long-term plan to establish a dominating presence in Los Angeles, and its recent success moving into cities suggests good signs ahead.

Apple is currently trading around $700. It has revenue of $148.81 billion, and its revenue growth is 22.58%. Barnes & Noble is currently struggling in the stock market, trading around $12. It has revenue of $7.16 billion, and its revenue growth is 2.47%. I do not expect these companies to be greatly affected by the recent news, although Wal-Mart dropping the Kindle should have an ever-so-slightly positive effect on these companies. This is nothing that investors should act on though.

Amazon is currently trading around $257, which is nearly the highest it has ever been. It has revenue of $54.33 billion, and its revenue growth is 29.47%. I do not expect the stock to drop in a major way, but I do think it will falter for some time as it adjusts to these changes for the company. Now may not be the time to buy Amazon, especially if it's trading above $250, but there's no reason to doubt that given a few months of adjustments it'll spurt back up.

Amazon is still attempting to maintain an edge with shipping time, and this may eventually work out for the company. I think it will take a while for this to even begin to counteract the addition of sales taxes to Amazon purchases and the loss of support from major retailers like Target and Wal-Mart. There is a lot working against Amazon at the moment. Even though I think it will pull through, I do not think it has an easy path in its near future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was prepared for Freedonia Freelance by one of our analysts.