by Jharonne Martis.
Amazon is back with its second Prime event this year, and retailers are ready to ride the coattails of Prime Day, part 2, with their own sales again. The first event last July offered steep promotions to lure shoppers, which helped July U.S. retail sales post one of the strongest showings this year.
In the current environment, consumers remain cautious and are trading down. As a result, retailers are betting that heavy promotions will entice shoppers to open up their wallets, especially since consumers have become value-oriented.
E-commerce growth comparison
Amazon’s second Prime Day takes place on October 10-11, the same week as last year. October’s Prime Day sales will affect Amazon’s Q4 2023 revenue. For the three months ending December 2023, revenue from online stores is estimated to grow 7.3% to $69.216 billion, and is on track to be stronger than the previous three pandemic years (Exhibit 1).
Exhibit 1: Amazon Prime Day Revenue in USD Millions: 2019 Actuals – 2023 Estimates
In terms of year-over-year growth, Walmart is expected to see the biggest gain online for the fiscal quarter that includes Prime Week 2023. The discounter is expected to post a 15.0% e-commerce growth (Exhibit 2).
Source: LSEG I/B/E/S
Analysts polled by LSEG are already bullish on Amazon’s performance for both Prime events this year. The first Amazon Prime Day took place this year July 11-12 which benefited Amazon’s Q3 2023 revenue. For the three months ending September 2023, Amazon’s Q3 2023 EPS consensus, including Prime sales, is $0.58. However, there’s a StarMine five-star rated analyst with a very accurate rating that published a Bold Estimate, which is different (in this case higher) than the consensus estimate. This suggests that it’s likely that Amazon will beat earnings and post a positive surprise. The same can be said for Q4 2023 earnings, which will benefit from October’s Prime event.
Amazon also scores in the top decile with the StarMine Analysts Revisions Model (ARM) with a score of 98 out of a possible score of 100. This StarMine model suggests that analysts polled by LSEG are likely to revise earnings estimates upward for Amazon. StarMine uses I/B/E/S estimates, fundamentals and other LSEG content to provide robust alpha-generating predictive analytics and quant models.
Discounts in the U.S.
Amazon will offer these deals primarily online and only to its Prime subscribers, whereas Target, Walmart and others will offer the same deals in-store and online. Still, price comparison will happen online.
The discount penetration (how much of the assortment is on sale) is 32% in the U.S. LSEG discovered this in a collaboration with Centric Market Intelligence, formerly StyleSage, which analyzes retailers, brands, online trends and products across the globe (Exhibit 4).
Exhibit 4: Average Discount Penetration for U.S. Retailers: 2019 – 2023
While still early in the month, the October discount penetration of 32% is slightly above the 31% average retailers posted in the first half of 2023, as retailers try to piggyback on Amazon’s Prime Day deals to build customer loyalty and entice shoppers to spend on discretionary items. Demand for discretionary items had been weaker than usual this year as consumers traded down, and preferences have changed.
Conversely, last year the most sought-after items during Prime Week included discretionary items such as outerwear and jackets (Exhibit 5). Given the economic climate and consumers’ appetite for staples, it will be interesting to see if this pattern holds.
Exhibit 5: Last year’s top sold out categories across Prime Week 2022
Source: Centric Pricing, formerly StyleSage Co.
Meanwhile, the average percent discount in October so far stands at 37%. This is slightly below the 2023 average of 39%, but this average could still shift over the remainder of the week (Exhibit 6).
Exhibit 6: Average Promotional Discount for U.S. Retailers: 2019 – 2023
Source: Centric Market Intelligence, formerly StyleSage Co.
Although Amazon initiated Prime Day, other retailers like Target introduced Cycle Week to take on Prime day promotions. This event is exclusively offered to Target’s clients who are part of its loyalty program. Unlike Walmart and Amazon where shoppers have to pay to participate in the membership, Target’s loyalty program is free.
Accordingly, Target is remaining “competitive with the market” by following a similar pattern to others in the industry on Prime Week. Target has been ramping up its assortment around Prime Day to lure more members in the hopes to make them loyal customers.
“As an example, last year, we heard loud and clear that Target Circle members love exclusive events. So we repurposed last year’s Deal Days and made our Target Circle Week in July bigger than ever with incremental promotions and new ways to engage. In fact, we enrolled well over 0.5 million new guests during this event alone, more than 3.5x higher than in an average week.” (Source: Target Q2 2023 Earnings Call).
The battle for subscriptions
During the pandemic, shoppers flocked online as brick-and-mortar stores remained closed. Giant retailers, including Amazon and Walmart, saw a spike in membership as shoppers justified the annual fee. Since then, consumers’ shopping behavior has changed dramatically.
Recently, Walmart raised its full year guidance, as more consumers continue to gravitate towards everyday values and become loyal shoppers. “During the quarter, we achieved record member acquisition tied to Walmart Plus Week and continue to enhance the value of the Walmart+ membership. We introduced Walmart+ Assist, which provides a 50% discount off the regular membership fee for customers receiving government assistance. We also partnered with Expedia Group to launch new travel benefits for members.” (Source: Walmart Q2 2023 Earnings Call). Thus, Walmart continues to offer enticing promotions and deals to gain more subscribers on top of the enormous gain they received during the pandemic.
In the last fiscal quarter, Costco reported an impressive renewal rate of 92.7% in the U.S. and Canada, up 0.1% from its previous quarter.
Still, in terms of revenue in dollars, Amazon still brings in the highest amount in U.S. dollars (Exhibit 7). Many shoppers couldn’t justify Amazon’s annual fee until the pandemic, when they started to buy everything online, and started having Whole Foods deliver for the first time. They also started streaming Prime TV movies and binge-watching series. As a result, back then, Amazon saw a whopping 28.7% gain in subscription services revenue in the midst of the pandemic (Q2 2020).
The pandemic pulled forward a lot of demand that, once satisfied, started showing up in slower Prime membership revenue growth. In the last fiscal quarter, Amazon grew its subscription services revenue by 13.5% from the previous year to $9.894 billion. This, however, is projected to see a slowdown in growth to 11.5% in Q4 2023.
Nevertheless, in the last fiscal quarter, Amazon reported a membership revenue gain of 13.5%, followed by Costco’s 13.7% gain (Exhibit 7). In order to attract new customers, Walmart is currently offering a free 30-day trial to its Walmart+ membership – coinciding with Prime Week. Then, it is $98 annually, making it the least expensive out of the three club memberships fees. Costco’s membership offering ranges from $60 to $120, below Amazon’s $139 membership fee.
Analysts polled by LSEG are bullish on Walmart’s ability to continue to grow its membership, and project an increase in membership income by 3.3% at the end of this year.
Exhibit 7: Amazon, Walmart and Costco Membership Revenue in USD Millions: 2021 – 2023
Source: LSEG I/B/E/S.
COGS / Gross profit
Last year’s inflation caused several retailers to deal with higher cost of goods sold (COGS). Since then, supply chain issues have eased compared to a year ago. Retailers are no longer dealing with the high freight and shipping expenses they did during the pandemic years. COGS have come down from those higher levels (Exhibit 8).
Moreover, retailers were less promotional during the first half of 2023. All these factors, in turn, helped retailers beat earnings expectations and post healthier margins in the first half of 2023. Therefore, retailers are taking a bit more risk and ramping up discounts to attract shoppers in the second quarter. Currently, Amazon has the highest gross profit margin compared to Target and Walmart (Exhibit 8).
However, It’s important to note that Amazon businesses include e-commerce, digital advertising and Amazon Web Services (AWS), among other divisions. As a result, Amazon’s gross profit is not a reflection of just its online retail business. And, it likely wouldn’t even be that high if not for the 15.6% of revenue generated from AWS.
Exhibit 8: COGS and Gross Profit for Q3 2022 – Q3 2023 Estimates
Source: LSEG I/B/E/S
To gain a better understanding of Amazon’s profitability, we turn to the StarMine Earnings Quality (EQ) Model. According to the StarMine EQ Model, Amazon scores a 24 out of a possible 100. Placing it in the bottom quartile suggests that earnings might not be derived from sustainable sources. The company’s operating efficiency component suggests that Amazon could use some help in this area.
Amazon operating profit margins have been declining for almost three years. It’s profit margin of 3.3% is below the multiline retail industry of 9.7%. It likely wouldn’t even be that high if not for the 30% margins at AWS. Our research shows that companies with low returns tend to have a lower probability of sustaining earnings in the future.
Exhibit 9: Amazon Operating Profit Margin
As an equity investment, Amazon’s stock price looks a little expensive. After adjusting long term growth (LTG) estimates for optimism bias, the StarMine Intrinsic Value (IV), which adjusts for the optimism bias often found in analyst estimates for faster growing companies and estimates well into the future, projects a 5-year CAGR of 16.2%. That’s slightly above the industry median of 16.0% and well above Amazon’s peer median of 6.8%. Although projected to grow faster than its industry and peers, the market expects Amazon to grow faster still. At $127.96 (the last closing price as of this writing), Amazon’s Market Implied Growth is 30.2%. This number is intended to represent current market expectations – how much growth is currently priced in. Amazon is a high-expectations stock. [Note, the industry growth is 16.0%, not 30.2%] On a relative valuation basis, Amazon’s stock isn’t cheap either, with a F12M EV/EBITDA. While the stock took a plunge for being a pandemic darling, it’s still up 52% YTD.
Research has shown that sell-side analyst estimates include significant systematic errors and biases. Our StarMine Intrinsic Valuation (IV) model has identified and systematically removed three forms of analyst error and bias to improve the accuracy of longer-term estimates and enhance their ranking and sorting abilities.
Third quarter retail earnings forecast
Looking forward to the third quarter of 2023, our LSEG retail earnings data show the U.S. Retail and Restaurant Q3 earnings index, which tracks changes in the growth rate of earnings within the sector, expected to show an 11.1% growth over last year’s levels. Our metrics show that seven of 10 consumer-related industries have turned negative (Exhibit 10). Of these industries, tracked by LSEG, the Broadline and Hotels, Restaurant & Leisure sectors are headed for the highest earnings growth rate in the third quarter, recording a 147.1% and 45.4% gains, respectively, over last year’s robust growth.
For over a year now, consumers have been making up for lost time during the pandemic, and are prioritizing their spending on travel and eating out again this year. This trend is expected to continue in the second half of the year as consumers’ preferences have changed towards services. Still, the strong earnings growth rates in Broadline retail show that consumers are starting to feel better about extending themselves for discretionary items.
Exhibit 10: Retail Earnings Growth Rates: Q2 2023