Amazon shock: on the same planet as everyone else

The analysts have jumped all over Amazon, following the release of a set of fourth quarter and full year results that demonstrated that no company walks on water (well, not indefinitely).   In part, Amazon have brought this upon themselves; they failed to live up to their guidance, having not learnt the “under-promise, over-deliver” rule that Apple always applies to its relationships with the investment community.

Jeff Bezos has reminded us that he wants to be a high sales, low margin company, rather than vice versa.  It’s well understood that Amazon is investing in distributing barely profitable Kindle hardware in order to secure future content sales worth many multiples of the original investment.  But that spectacular P/E ratio has come under some pressure – the Publishers Weekly account of the investors’ call is worth a look.

When I’m looking at financial statements, I always start with the obvious operational numbers, and these certainly suggest a flattening in Amazon’s growth trajectory:

North America:

Sales uplift, Q4:

2011 vs 2010:  +37%

Sales uplift, full year:

2011 vs 2010:  +43%

This does feel like a reversal, in that one would expect all of the hard work from the full year to deliver extra benefits at Christmas, and that those much discussed Kindle Fires would have made a material difference to sales in Q4.

Unfortunately, operating expenses are up, so margins have tightened.

Operating expenses, Q4:

2011:  97.1% of sales

2010:  95.9%

Operating expenses, full year:

2011:  96.5% of sales

2010:  94.9%

Operating income, Q4:

2011:  2.9% of sales

2010:  4.1%

Operating income, full year:

2011:  3.5% of sales

2010:  5.1%

What is a little unusual about these numbers is that they fly counter to normal retail practice.

If I’m running a bricks and mortar shop, my occupancy costs in the fourth quarter are largely unchanged – perhaps a little more heat and light than in the summer, but rent and taxes are stable.  My staffing costs are higher, but not proportionately – retail staff are much more productive in the Q4 than through the rest of the year.  So, although my gross margins may be subject to competitive pressure, my costbase shrinks hugely as a percentage of sales.

This is why traditional retailers refer to Q4 as the “golden quarter” – it’s when they deliver the lion’s share of their annual profitability, and run with the highest efficiency.  In a bookstore, I might see my pay-to-sales ratio drop from 11% in June to 6% in December.  This is because hitting the cash registers is a small part of the total work done instore, and other activities – receiving goods, merchandising, interacting with customers – deliver much higher returns in December.

However, I guess it’s different online.  I have no doubt that Amazon runs some of the most sophisticated warehousing in the world, but I’m going to guess that higher transaction volumes lead to higher payroll cost – there are fractional gains from selling large quantities of a small number of titles, but the manual processing required won’t diminish exponentially, as it does in a physical shop.

The other possibility that these numbers suggest is that Amazon discounts even more furiously in Q4 than it does through the rest of the year, in pursuit of always providing the very best value for its customers.  Given that Amazon is so often the price leader in its category, you do wonder if some of that discounting is being sliced just a little too thinly for Amazon’s own good?

Now, these are simple, bricks vs clicks parallels – and the opacity of Amazon’s reporting inevitably leads to much speculation.  There are plenty of questions specific to the Amazon model for investors to ask – is Prime costing more than it’s delivering; when will Amazon reap the dividend of selling Kindles at around cost, etc.

All of the above applies to Amazon’s “mature” market, North America, where sales are up by “only” 37%.  The rest of the world is lumped under the heading of “International”; new territories are being opened up, and new products and categories launched.


Sales uplift, Q4:

2011 vs 2010:  +31%

Sales uplift, full year:

2011 vs 2010:  +38%

Away from North America, growth is significantly lower than it is at home (and exchange rate shifts mean that like-for-like growth is overstated here).  This may reflect the very sluggish/recessionary European economies – America is starting to see a recovery that Europe is still waiting for.  Of course, Q4 growth of 31% (29% currency-corrected) still compares pretty favourably to, say, the BRC’s +2.2% UK like-for-like sales in December, or CapGemini’s +16.5% like-for-likes for online retailers in the UK over the same period.

But it all comes at a cost:

Operating expenses, Q4:

2011:  97.6% of sales

2010:  94.3%

Operating expenses, full year:

2011:  97.0% of sales

2010:  93.7%

Operating income, Q4:

2011:  2.4% of sales

2010:  5.7%

Operating income, full year:

2011:  3.0% of sales

2010:  6.3%

In mature retailers, when margins halve, alarm bells ring.  There might be one-off costs, of course – launching new products; or one-off crises – warehouse meltdown being a favourite.  However, there’s no suggestion from Amazon that they’re anything but happy with these results, and they’ve weathered worse.  Still, that economies of scale question is an interesting one to ponder…

Photo ©Les Wilson

Christmas trading 2011: results table – Wednesday (and final?) update

25th January 2012

WH Smith traditionally brings the Christmas results season to a close, and here they are, down 6% in the high streets and 3% at their Travel division.  Although this was accompanied by the usual statements about the entertainment categories (CD, DVD, now an infinitesimal part of Smith’s mix), and “resilience”, “challenge” and “cost controls” all made their usual appearances, there was little indicating retail progress.  Strong categories?  Kobo and online?  Former British Bookshops stores?  You can manage a business for cash for so long (and it’s been so long that it’s remarkable), but at some point you have to sell more product, to more customers, more often.  That’s what we want to hear from WHS, and it’s what’s missing again.

19th January 2012

I’ve been on the road for the past couple of days, and quite a few gaps in the table have been filled during that time.  Strong sales from Primark and Matalan indicate that there’s still a desire for value when it’s done well.  Of course, you might say the same about Peacocks, which by all accounts remained operationally profitable, but has been crippled by debt and forced into administration, threatening the biggest one-off loss of retail jobs since Woolworths in 2008.

The Centre for Retail Research in Nottingham has published a sobering schedule, detailing retail failures from 2010-2012.   They state that, over the five years 2007-2011, 173 retail businesses folded, comprising a breathtaking 18,342 stores, and over 150,000 jobs.  Questions please to the CRR –here’s the link.

Back to Christmas 2011, and at the other end of the fashion scale, Burberry and Mulberry have announced excellent growth, but it’s been unclear whether the numbers have referred specifically to UK retail, so I’ve omitted them.

No such qualms with not-retailers-at-all Greene King and JD Wetherspoon.  Looks as though we still have money to spend on a night at the pub!  And animals had a good Christmas, even if their owners cut back, with Pets at Home up 4.9%.

I posted a like-for-like book sales for Oxfam last week, and this has been followed by a flurry of other figures, reported in the Guardian.

Biggest news from the mid-week period has been from the electricals retailers, with Dixons (Currys/PCWorld) hailing -7.0% as a relative success, and Comet’s  -14.5% a reflection of the grim condition of a business struggling through a sale process, and pretty much disowned by Kesa.

However, I think there are good things to be said about Dixons, but they need a separate blog – watch this space…

16th January 2012

Just three additions today – Boots and The Perfume Shop, both looking good; and the McArthurGlen outlet centres, which appear to have had an exceptional season.  It’s worth bearing in mind that Christmas historically has peaked early at outlet “villages” like Swindon and Cheshire Oaks – outlet customers search out the best bargains early, and then complete their shopping in traditional malls and high streets – from memory, the final weekend in November was typically the best in the run-up to Christmas.

Who are we still waiting for?  Of those who made Christmas trading announcements last year: Electricals – Currys/PCWorld and Comet; books/media – WH Smith and Waterstones (though the latter is now privately owned, so is under no shareholder pressure to announce); fashion: Primark, Matalan; DIY: B&Q (though Christmas is hardly a prime season for them, it’d be good to benchmark their performance against Homebase and GCG).

Who would we like to hear from?  Big, successful private businesses like Arcadia and River Island; PE-owned growers like Pets at Home and Hobbycraft; discount grocers like Aldi and Lidl, and bargain retailers like Poundland; niche successes like Jack Wills and Cath Kidston; mega-brands like Selfridges…  It’s a long list, and any analysis of published numbers is inevitably just a snapshot of a sector which is far less plc-dominated than in the past.

13th January 2012

A quick final update before the weekend is upon us.  Has Tesco had enough press coverage?  As Twitter noted last night during News at Ten, you’d think they’d called in the administrators…  Still, Philip Clarke has been very candid about the challenges Tesco faces, and has been reminded (as The Times editorial today emphasises) that no company stays at the top forever.  I’m thinking hard about Tesco Extras, and a separate blog might follow…

Nils Pratley on The Trouble at Tesco

Harry Wallop on Is This the End of Tesco Dominance? (QTWTAIN)

Meanwhile…  Good numbers from Original Factory Shop, The Entertainer and Superdrug, but another tough season for Theo Fennell.  Nul points to Asda and Ted Baker for announcing total growth for Christmas, but not like-for-likes.  Of course, I appreciate they don’t have to announce anything at all, but if I had shares in Wal-Mart, I’d want to know what was what.

12th January 2012

After a positive start to the week, things have turned ugly with poor results from Tesco spooking the markets, and throwing fresh doubt over the sector.

As you can see from the table above, Tesco has performed significantly worse than other supermarkets (and M&S food, which has been broken out separately in reporting, and which saw a like-for-like increase of 3%).

House of Fraser has posted some remarkably good numbers, but it isn’t clear whether they’re inc or ex-VAT.  For the record, I’m a committed ex-VAT person – including a variable rate of tax in your sales is no way to accurately reflect like-for-like shopper behaviour.

(At Borders, 75%-80% of our sales were VAT-free – books, newspapers and magazines – and the remainder was VATted – stationery, CDs, DVDs, toys etc.  We also paid a “special rate” of VAT, where eg a CD-ROM was attached to a book on computing or language learning, which reflected the fact that part of the whole product was zero-rated.  I’d like to think that the HMRC officers required to create and police these rules, and audit the proceeds, cost rather more than the total tax take.)

Anyway, back to Christmas 2011, and as expected, times were tough at the likes of Halfords, Thorntons and Mothercare.  Argos had a particularly grim set of results – for how long will 750 stores be sustainable?

Some more variances to reporting periods, highlighted in green.  These were the reporting periods twelve months ago:

  • Tesco LY: 6 weeks to 8th January
  • JD Sports: 5 weeks to 1st January
  • New Look: 15 weeks to 8th January
  • House of Fraser: 5 weeks to 8th January

FTSE 100 retailers are now shown in bold.

10th January 2012

Plenty of results added to today’s table, including a couple of outriders that you may not have seen reported elsewhere!

Game takes over at the unhappy end of the chart; their LY numbers are highlighted because of a change in reporting period – for 2010, they reported five weeks to 8th January, this time around, an additional three weeks pre-Christmas were included.  The Co-op also made a change – the prior year numbers relate to a 13 week period, October – December.

There’s some inc-VAT (Debenhams) and ex-VAT (Majestic) differentiation, which given the rate jump from 17.5% to 20% has a bearing on different companies’ numbers.  And of course, these are just sales – not profits.  The rumbling undercurrent – “of course, their margins will have taken a hit” – accompanies many of these announcements.

Nevertheless, it’s great to see many more pluses than minuses on the schedule – long may it continue…

9th January 2012

And they’re off.

It looks as though this year, every media source and his dog is going to be publishing regular updates on Christmas trading, so I’ll keep this brief, and update it as required.

I’ve included last year’s numbers, where I have them – and as this is a busy office, I haven’t dug out LYs where I previously didn’t have them – I’ll try and infill if Edwin Drood becomes unwatchable.

Worth noting that, where comparisons exist, the order of companies is exactly the same as last year.  (The reporting periods are all similar, so these are good comparisons.)

It’s worth remembering that bad results always take longer to calculate than good ones…

And for the many hundreds of you who enjoyed my “8o towns” blog from last week, I’ve shown store numbers.  Counting stores is always an inexact art, but most of the chains are on multiples of eighty.  Some will stay that way – supermarkets, Next.  But there’s restructuring in the air.

Just to keep us all honest, this article from the Telegraph highlights some of the more imaginative ways that Christmas performance can be characterised.

And, lest we forget, the following chains probably won’t be providing Christmas trading updates:

Barratts Priceless, Blacks, D2 Jeans, Hawkins Bazaar/Tobar, La Senza, and Past Times.  Ask not for whom the bell tolls, but let’s hope stores can be rescued, and jobs maintained.