Amazon.com Inc. has seen “deterioration” on a key metric relative to 2020, but the company’s past growing pains could translate to underappreciated opportunities.
That’s the view of BofA Securities analyst Justin Post, who saw “a lot of room for growth (and upside) ahead” as Amazon
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looks to become more efficient with its retail business.
Wall Street has “relatively limited” expectations for Amazon to improve retail margins, according to Post, who noted the consensus view implied that margins this year only get about 1.4 points better than last year, factoring in the improvements that the company already saw in the first quarter.
Plus, “Street estimates at 1 [point] of retail margin expansion in 2024 seem conservative given drivers from here,” he added. Post was “encouraged by CEO commentary that retail margins could improve beyond pre-pandemic levels (4-5% in the U.S.).”
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Amazon’s retail margins came under pressure during the pandemic as the e-commerce giant doubled down on investments, pouring money into fulfillment and transportation initiatives.
“The unprecedented investment led to deteriorating efficiency, with noticeable declines in utilization metrics such as Units sold per Square Foot,” Post wrote. “However, these metrics improved significantly in Q1, and while ’23 margins should be much improved vs ’22, we think there is room for margin expansion and upside in ’24.”
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Post saw five ways Amazon could boost retail margins from here: “logistics optimization, regionalization, advertising growth, new fees and robotics.”
He noted that the company has closed some facilities and exited certain new projects, signaling that the company is taking a more efficient approach to logistics. Further, Amazon is in the midst of moving to a regionalized system from a national network, a move that could reduce Amazon’s shipping costs by cutting back on the need for national shipping.
Post was also upbeat about Amazon’s ability to reap the financial rewards of its budding advertising prowess. The company’s advertising business likely is of greater interest to marketers nowadays given privacy-related changes from Apple Inc.
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that limit third-party tracking.
“With greater logistics efficiency, we think more advertising revenue profit could flow through to the bottom line,” Post wrote.
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Additionally, he thought the company is taking a rational approach to consumer fees, having recently upped the spending threshold required for customers to obtain free grocery delivery, for example. The company has also increased seller fees in another potential margin-enhancing move.
Finally, he was optimistic about the company’s potential to drive efficiencies through robotics.
“Advanced robotics should enable greater capacity and throughput from the existing employee base,” he wrote, and the company has compelling newer initiatives, including one that uses computer vision “to detect ‘millions’ of items in Amazon’s product catalogue, representing about 65% of existing inventory.” Currently, the process of getting items from shelves and packing them up is “highly manual.”
Post boosted his price objective on Amazon shares in Monday’s note to clients, while keeping his buy rating.
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