Amazon To Open First Brick-and-Mortar Store, What's Next for AMZN?

The American e-commerce juggernaut, Amazon (AMZN) is no doubt facing stiff competition from other online and mobile commerce giants by the likes of Alibaba Group Holding (BABA), and eBay Inc. (EBAY). Amazon’s founder and CEO, Jeff Bezos, has decided to take matters in his own hands, and he has set up the first physical store for AMZN, due to open right across the street from the Empire State Building in New York City.

It will be the perfect opportunity if it comes to fruition as the holiday shopping season will be upon us. There are also plans to open up more stores that will act more like small warehouses, if the Midtown Manhattan one fares well. The plan is to have same day delivery for New York through that mini-warehouse.

AMZN is also set to report earnings later this month on October 23^rd, however, we must remember that the last earnings report, on July 25^th, did not impress investors as the stock severely tumbled down due to AMZN reporting a loss of $123 million, despite the fact that revenue was up by 23%. Many investors are worried and will want to play it safe for the upcoming report; however, is Bezos just getting started?

AMZN just teamed up with MediaTek for new Fire HD Tablets which are designed for consumers who are looking for high-performance devices at an affordable price. Is it wise to go down the brick-and-mortar road? We will look at how AMZN has been doing this quarter financially, along with the prospects for the company after this move.

Prospects and Consequences for Physical Store

AMZN’s rapid expansion since its inception back in 1994 has brought it worldwide fame and success, but it is now threatened more than ever by more companies jumping on the e-commerce bandwagon. We saw how the Chinese goliath, BABA stole the spotlight at the NYSE when it debuted last month. AMZN’s distinguished success relied on the firm’s ability to deliver to customers anywhere in the world in a good range of time. AMZN needs to reinvent itself and innovate, however physical stores may not be the solution.

Many argue that AMZN’s advantage was that it was solely an online megastore, and that a physical store would defeat the very purpose of AMZN. The store at 7 West 34^th Street is also expected to display AMZN’s signature products such as its Kindle line of e-readers and tablets, Fire smartphones, and video-streaming boxes. The store underscores a major event in the company’s history, and will definitely have repercussions on the company’s balance and income sheets.

First and foremost, there will now be a sales tax on everything sold from that store, something that AMZN has nimbly avoided in the past by capitalizing on its Internet business model and the cost-savings approach of forgoing a vast physical retail chain. Opening up a brick-and-mortar will serve as a catalyst to re-value the enterprise value of the company, bearing in mind that there will be added costs. Not good, especially when we consider how the company has already been struggling to turn a profit and thrive in a volatile market.

It is also worth mentioning that AMZN already has same-day delivery in NYC without the addition of the good old physical store. When we take all this into account, Bezos seems gravely mistaken, especially when AMZN’s strategy has killed retail chains like Radio Shack (RSH), and Best Buy (BBY). Will a retail store continue culling smaller chains or will it prove otherwise? The aspect of AMZN that makes it unique is that it’s all on-line, no bustle, and no hassle, and best of all.

On the bright side, we must remember that this isn’t just any store, this is likely to be a flagship store meant to market the AMZN brand name, and it will be in the shadow of the Empire State Building, a NYC landmark which attracted roughly 4.3 million visitors to its observatory in 2013 alone. An AMZN store is definitely not a terrible idea considering how Macy’s (M) flagship attracts more than 20 million shoppers in the city that never sleeps. Bezos is definitely eyeing the long lines wrapped around the Apple (AAPL) stores whenever there is a new release. Without further ado, let’s examine the company’s financials and key data.

AMZN’s Financials

AMZN is not doing too badly financially. According to analysts at Bernstein Research, AMZN has secured better gross profit margins, and analysts at Bernstein have reiterated that AMZN is a good long-term investment. The reasons behind so are mainly due to the company’s accelerating EGM (electronics and general merchandise) revenue, and gross margins, which are growing faster than AMZN’s expenses, a positive indication that business is growing for AMZN. Below is a comparison of AMZN’s financials from last quarter and the same quarter last year, 2013, and AMZN’s net income is taking a hit.

AMZN has not been doing well overall when we compare it to the S&P 500 Index in a six month timeframe. It is clear that AMZN’s growth is lagging behind, and the stock has not rebounded from its highs prior to the Q2 earnings report on July 25^th.

A few important facts and figures to look into before considering whether AMZN is the right investment for you or not are below, and it is noteworthy that AMZN’s enterprise value is according to Yahoo! Finance. The company’s enterprise value is somewhat lower than the company’s market capitalization, indicating that there may be better opportunities to invest in AMZN, perhaps if the company misses the upcoming earnings estimates.

Round Up

It is too soon to tell whether Bezos is moving in the right direction or if unveiling a brick-and-mortar is a waste of money, time, and effort. AMZN retains so much of its sheer power and share of the market in the online realm, and perhaps it is wise to focus the company’s capital and resources into improving the online business and making it more profitable, like its Chinese cousin, BABA, which reported stellar earnings in its last conference call. The company’s record of surprising is not that shiny either, and AMZN maintains an average surprise rate of -43.77%.

However, it is worth noting that AMZN currently sports a Zacks Rank #4 (Sell), and it is unlikely that the company will beat earnings in the upcoming report, considering how analysts have revised and decreased their EPS outlooks for the mega online retailer as of late.

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