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Amazon’s Q3 Earnings: Should Retailers Worry?

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Amazon (AMZN) is scheduled to announce its third-quarter earnings after the markets close on Thursday. Will the results impact other retailers? The company has invested heavily to make one-day free delivery a standard for its Prime members. The reduced delivery time will likely challenge retailers. Currently, retailers face declining sales.

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Amazon’s expansion 

During the first-quarter conference call, Amazon stated that it would spend $800 million to reduce the shipment time to one day for its Prime members. Management expects the one-day free delivery service to boost its sales in North America. Also, the company is increasing the number of items eligible for one-day free delivery. Amazon will likely provide an update on one-day shipping for its Prime members, which could hurt retailers.

On Wednesday, Amazon announced that it’s expanding Amazon Counter, its in-store pickup service, to new locations. Notably, Amazon Counter gives customers the option to pick up their online orders in-store at a partner location for free. Also, Amazon announced the addition of new partners, including GNC, Stage Stores, and Health Mart.

Amazon’s retail expansion is making apparel and grocery retailers nervous. So far, Macy’s (M), Gap, and L Brands are struggling to lift sales amid increased competition from Amazon. Recently, Credit Suisse downgraded Macy, Gap, and L Brands stock to “underperform.”

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In contrast, Walmart (WMT) and Target (TGT) are also investing heavily in their digital businesses to match Amazon’s services. Target and Walmart are rapidly expanding same-day delivery and in-store pickup services, which are driving the comps. However, higher investments in digital fulfillment are taking a toll on Walmart and Target’s margins.

We expect Walmart and Target to continue to report strong comps due to expanded digital offerings. However, increased re-investment needs to match Amazon’s services could hurt their margins.

What to expect from Amazon’s Q3 earnings 

Analysts expect Amazon’s top line to increase more than 20% in the third quarter due to strong growth in North America and its AWS business. Analysts expect the company to post revenues of $68.81 billion. Despite stellar sales, Amazon’s earnings could decline, which would reflect increased investments in distribution and transportation. Incremental spending on reducing the shipment time will likely hurt Amazon’s earnings.

Analysts expect the company to post earnings of $4.61—down about 20% YoY. Amazon stock has risen 17.6 YTD (year-to-date) as of Tuesday. Recently, the stock corrected. Mounting regulatory scrutiny remained a drag.

In comparison, Walmart and Target stock outperformed broader markets. The stocks have risen 28.5% and 72.0%, respectively. Comps growth, due to digital transformation, is driving Walmart and Target shares.

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