Short All Retail, Especially Amazon

“Bubbles require ever more money to sustain them. Currently that’s not happening. A severe market selloff could come at any moment.”

The quote above is from Fred Hickey, who writes the The High-Tech Strategist newsletter. Mario Draghi, Chairman of the ECB, is under pressure to reduce the Central Banks’ asset purchases (it’s buying corporate bonds, including junk-rated bonds). Apparently some Dutcn legislators presented Draghi with a tulip in reference to the Dutch tulip mania in the 1630’s.

The Bank of Japan and the Chinese Government are working to reduce their money printing. The Fed is still buying mortgages but it seems determined to slowly tighten monetary policy. The problem faced by these Central Planners is that they’ve created a massive global Ponzi scheme that requires an increasing amount of liquidity (money printing + credit expansion) in order to sustain valuation levels. Once they slow down the liquidity spigot, all fiat currency- driven assets (except physical precious metals) are at risk of collapsing.

The Dow finished the week closing down 4 days in row to close essentially unchanged for week (up 9 pts). The SPX also was flat for the week (up 6 pts). It managed to squeak out a slight gain on Friday to avoid 4 consecutive down days. Both the Dow and SPX started out Friday with a big rally from Thursday’s close but faded over the last 2 hours of trading on no apparent news triggers. This for me is a possible indicator that the stock market losing energy.

Bed Bath and Beyond (BBBY) was hammered Friday, down over 12%, as it badly missed earnings and revenue estimates. I presented BBBY as a short idea in the December 16th SSJ issue at $47.27. I hope some of you jumped on it then, as 4 days later it had closed at $41.38.

Amusingly, Jim Cramer, et al attributed BBBY’s lousy quarter to competition from AMZN. But nothing could be further from the truth. Its sales were up slightly from Q1 2016 and
its digital channel sales grew 20%. If anything, BBBY’s e-commerce business presents intensified competition for AMZN. Why? Because AMZN’s e-commerce operating margin is 0.3% vs. BBBY’s, which was 5.4% in Q1. BBBY has plenty room to go directly at AMZN on pricing.

BBBY’s net income dropped 39% vs. Q1 2016. The primary culprit was that BBBY lowered its free shipping threshold to $29 from $49. which in turn forced BBBY to absorb shipping costs on more orders. AMZN does not properly accrue the cost of its free shipping to its cost of sales (the SEC looks the other way on this one), burying the expense across the income
statement and balance sheet. But we know it has a reported 0.3% operating margin in e-commerce. The hit to BBBY’s operating margin, which declined 242 basis points (2.42%), gives us some insight about true cost inflicted on AMZN from its free shipping program.

My point here is that the overall retail environment is going to get more competitive and margins are going to decline even more. Companies like Walmart and BBBY have taken the gloves off and can afford to undercut AMZN across the board because they have significantly more room to cut prices and attack AMZN’s pricing and free shipping model without driving their operating margins down to zero. AMZN’s e-commerce profit margin, for all intents and purposes, is zero. The bottom line here is that retail in general remains a great sector to short.

I believe BBBY has a lot more downside and can still be shorted, with patience, for some nice gains:

The more interesting short is AMZN. About a month ago, right before completing the check-out process on AMZN, I received a message in which AMZN was offering a $5 shopping credit to fund a gift card with $100. Why is AMZN paying 5% to raise cash? It effectively is taking a 5% operating profit margin hit on the $100, because its overall e-commerce operating margin is essentially zero. And I discovered yesterday that AMZN was offering a $5 shopping credit to Prime members who opted for the slow shipping option rather than the 2-day shipping.

These cash-raising and cash-saving policies make no sense if AMZN is producing the billions in free cash flow as represented by Bezos (on a non-GAAP basis, of course). Something is very wrong beneath the surface. In fact, AMZN burns cash every quarter. I have demonstrated that in previous research I have produced. It’s a fact.

In the meantime, AMZN continues to be, along with TSLA, the greatest Ponzi scheme in history. Bernie Madoff is green with envy. The irony surrounding all of the analyst – and Jim Cramer – noise about AMZN is that its acquisition of Whole Foods makes it more vulnerable to competition. The idea that AMZN will now be a “grocery killer” is absurd. Just like the idea that it’s a retail killer. BBBY’s e-commerce grew at 20% year over year.

If anything is true, it’s that BBBY, Walmart, Target and Kroger present intensified e-commerce competition for AMZN.  And all four of those companies can cut prices to compete and still turn an operating profit.  AMZN does not have that luxury. That’s probably why AMZN is encouraging Prime customers to take the slow shipment option with a $5 shopping credit.

Most of the above analysis is an excerpt from this week’s Short Seller’s Journal, released Sunday evening. I discussed strategies for shorting BBBY. I also discussed shorting Kinder Morgan (KMI) in the context of declining energy price and usage and included for subscribers a somewhat dated, in-depth research report on KMI which details with proof the Ponzi scheme set-up at KMI. You can get more details about the subscription, including a “handful” of back-issues here:  Short Seller’s Journal info.  (Note: new subscribers also get a copy of the somewhat-dated full AMZN research report I wrote).

7 thoughts on “Short All Retail, Especially Amazon

  1. Did you know that Amazon has built and continues to
    refine their own delivery system ? They are now bypassing
    U.P.S. and buying and building distribution centers where
    a delivery force works and delivers within the radius of the
    delivery center. Amazon is actively recruiting delivery services
    that own multiple vehicles.

    1. That’s for the same-day deliveries – that’s also not cheap and it’s small-scale. It doesn’t cut that much out in terms of expenses.
      Fulfillment costs are the main reason why AMZN has a zero operating profit margin. UPS’ operating margin is 8%. How much of that expense can AMZN really cut out, especially vs. the amount of capital required to build out the operation? Analysts just don’t look at the actual numbers. They are only interested in selling the pot of gold at the end of the rainbow…

  2. Since Iam from Holland I can confirm that mr. Draghi was presented with a tulip by some members of our parliament. Mr Dragi gotten a huge grilling he is not used to when he came to the testify om his monetary policies and that was well hidden from him that the Dutch parliament did that.

    The Dutch are one of the few countries in Europe that have a ”pay your self collective penstion scheme”. Most of the rest of EUrope has a system, the younger pay for the old(er) scheme.

    We are told that we had to raise the pension age to 71 (in my case) to keep it affordable. In that inquiry of mr Draghi he could not deny that our pension funds have been robbed between 70 and 140 billion EUros because of his money printing. Thus being the main reason to raise the age when you can retire.

    Besides that, the EUropean parliament recently told because their memebers paid to little, we have to bail them out so they can retire as promised, we raised our pension able age by 6 years. In France they still retire when 60 even though much more of a train wreck they are.

    Restentment is building big time here. Iam suprised there is no all out revolt yet.

    Regards,
    Hugo

    1. That’s for the same-day deliveries – that’s also not cheap and it’s small-scale. It doesn’t cut that much out in terms of expenses.
      Fulfillment costs are the main reason why AMZN has a zero operating profit margin. UPS’ operating margin is 8%. How much of that expense can AMZN really cut out, especially vs. the amount of capital required to build out the operation? Analysts just don’t look at the actual numbers. They are only interested in selling the pot of gold at the end of the rainbow…

  3. Amazon has Wal-Mart getting worried. Now all of Wal-Marts
    obese customers won’t have to make the trek to the store
    as Amazon will deliver their HFCS directly to their door.
    The trucker issue is just Wal-Mart realizing that they are now the
    hunted and no longer the hunter. Pay back for putting all those
    mom and pop small town retailers out of business.
    Karma sure is a bitch and she has Wal-Marts address.

    http://www.zerohedge.com/news/2017-06-28/it-begins-walmart-warns-truckers-it-will-no-longer-work-them-if-they-move-goods-amaz

    1. Actually, WMT is taking the gloves off. WMT is 3x larger than AMZN and it produces a 4% operating margin. AMZN’s e-commerce operating margin is 0.3%. WMT has plenty of room to take a financial 2×4 to AMZN’s head. I’m not defending WMT – I can’t stand the place. But Bezos has built the world’s greatest Ponzi scheme. He’s emblematic of the reasons the U.S. collapsing.

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