Image Shown: Shares of Amazon have surged over the past year. Compared to their March 2020 lows, shares of AMZN have almost doubled as of this writing on August 10, 2020.
By Callum Turcan
On July 30, Amazon (AMZN) reported second-quarter earnings for 2020 that beat consensus top- and bottom-line estimates by a mile. As of this writing, shares of AMZN have almost doubled since hitting their March 2020 lows as Amazon’s lines of business were well-prepared to ride out the storm created by the ongoing coronavirus (‘COVID-19’) pandemic, assisted by the firm’s pristine balance sheet.
Earnings Overview
Amazon grew its GAAP net revenues by 40% year-over-year in the second quarter of 2020, which hit $88.9 billion on the back of surging e-commerce demand. The pandemic has prompted many households to order their groceries and consumer staples products online instead of shopping in-store, likely for social distancing purposes (to keep away from large crowds in tight spaces). Management noted Amazon’s “online grocery sales tripled year-over-year” during the firm’s latest earnings call as the company aggressively expanded its home delivery capabilities for groceries (by 160% according to its earnings press release).
Please note the logistics behind delivering groceries is significant more difficult than delivering clothes, toys, or books, for example. Perishables (meat, fruit, vegetables, dairy products) need to be kept cooled for extended periods of time and delivery windows (due to the need to keep perishables constantly chilled) need to be tight (Amazon Fresh provides a two-hour delivery window for its customers). Refrigerated storage facilities are required to support these activities, such as those owned by AmeriCold Realty Trust (COLD).
Back in 2017, Amazon acquired Whole Foods through a $13.7 billion all-cash deal (including Whole Foods’ net debt) to support its efforts in this space. While Amazon had invested heavily in growing its e-commerce grocery business over the past few years, arguably it was not until recently that one could say with complete confidence that this strategy had proven to be effective.
Amazon’s ability to capture significant market share in the online grocery business is a huge win for the firm given the durable nature of these cash flows over long periods of time. A breakdown of Amazon’s performance in terms of online grocery sales by geographic segment was not readily provided, though it is likely that a lot of its success was in the US. Domestic supermarket sales were north of $700 billion in 2018 according to data from Progressive Grocery Magazine that was cited by the Food Industry Association.
In the second quarter, Amazon’s GAAP operating income surged 89% year-over-year, aided by growing economies of scale. Though Amazon’s fulfilment expenses and cost of sales surged during the period (a product of its e-commerce revenue growth, as this segment’s incremental sales incur meaningful incremental expenses), too, the increases in its marketing, G&A, and technology & content expenses were relatively subdued on a year-over-year basis, allowing for meaningful margin expansion. Last quarter, Amazon doubled its GAAP net income on a year-over-year basis, which climbed over $5.2 billion.
What makes this performance all the more impressive is that Amazon spent over $4.0 billion on COVID-19-related expenses last quarter. Here is what the firm had to say during its latest earnings call:
“Amazon’s second quarter was another highly unusual quarter. As I mentioned on our last earnings call, we began to see a significant increase in customer demand beginning in early March, and demand remained elevated throughout Q2. Strong early demand in groceries and consumable products continued into Q2, while demand increased during the quarter in our other major product categories like hardlines and softlines.
At the same time, we continue to focus on stepped up employee safety, particularly in our fulfillment and logistics operations, to help ensure the safety and well-being of our employees and partners. In Q2, we incurred more than $4 billion of COVID-related expenses, getting products to customers and keeping employees safe. The largest portion of these costs related to compensation for our frontline employees, including higher hourly wages through the end of May and a more than $500 million Thank You bonus in June.” — Brian Olsavsky, CFO of Amazon
Financial Strength
At the end of June 2020, Amazon had $71.4 billion in cash, cash equivalents, and short-term marketable securities on hand versus $33.1 billion in long-term debt (and no short-term debt). Its pristine balance sheet is an immense source of strength during these difficult times. On a trailing twelve-month basis, Amazon generated $27.0 billion in free cash flow through the end of June 30, 2020.
We appreciate Amazon’s ability to continue generating enormous free cash flows while the firm is investing heavily in growing its various businesses. As an aside, Amazon has not historically repurchased a meaningful amount of its stock. Its weighted-average outstanding diluted share count rose by a little over 1% year-over-year last quarter, largely due to stock-based compensation. Though Amazon does not pay out a common dividend at this time, if it wanted to, it could given its strong financials.
Recent News
Reportedly, Amazon and Simon Property Group Inc (SPG) have been talking about converting some shuttered Sears Holding Corporation (SHLDQ) and J.C. Penney Company Inc (JCPNQ) locations at Simon Property’s malls into warehouses for Amazon (both of those retailers have declared bankruptcy). Though nothing is for certain at this point, such a move would likely greatly benefit Amazon by allowing the firm to grow its ability to meet demand in affluent areas across the US. Potentially, these new locations could support Amazon’s online grocery business.
For Simon Property, such a move could allow the real estate investment trust (‘REIT’) turn a bunch of vacant (or soon to be vacant) properties into rental income generators, though the leasing cost per square foot Amazon would likely pay is much lower than Simon Property’s traditional tenants. It will be interesting to see what happens on this front.
Concluding Thoughts
We continue to be impressed with Amazon’s growth story and applaud the company for successfully pushing into the online grocery market (particularly in the US). Amazon’s near- and long-term outlook remains quite promising, though its share price clearly reflects a lot of that optimism.
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Dollar Store and Department Store Industries – KSS M JWN BIG DG DLTR PSMT
Food Retailing Industry – CASY COST CVS KR SYY TGT WBA WMT
Internet Content and Catalog Retail Industry – BABA AMZN BKNG EBAY EXPE GRPN IAC OSTK QRTEA STMP
Retail REIT Industry – CONE DLR FRT O REG SPG WPC
Related: JCPNQ, SHLDQ, SPY, ACI, SFM, IMKTA, GO, WMK, NGVC
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Callum Turcan does not own shares in any of the securities mentioned above. Realty Income Corporation (O) and Digital Realty Trust Inc (DLR) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Dollar General Corporation (DG) and The Walt Disney Corporation (DIS) are both included in Valuentum’s simulated Best Ideas Newsletter portfolio. Digital Realty Trust, CyrusOne Inc (CONE), and Vanguard Real Estate ETF (VNQ) are all included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Both the Best Ideas Newsletter and Dividend Growth Newsletter portfolios include a SPDR S&P 500 ETF Trust (SPY) put option holding with a $295 per share strike price that expire on August 21, 2020. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.