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Will Amazon launch today?

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By Paul Rickard

I don’t know about you, but I am sick and tired of hearing about Amazon’s Australian retail “assault”. The latest speculation is that it is set to launch in time for the Black Friday/Cyber Monday sales (Black Friday is the official start of the US Christmas sales season and follows the Thanksgiving holiday tonight when stores open for 24 hours and offer massive sales. Cyber Monday is the online sales equivalent, starting next Monday). According to one report, Amazon Marketplace sellers have been told to have their pricing, stock and details ready for an internal testing phase with a small number of customers that is due to kick off today.

The fact that this report was covered so extensively in our media tells you just how good the Amazon PR people are at getting the message out. It also tells you just how much fear there is about the power of Amazon with investors and in the broader retail industry.

Back to the fear in a moment, but firstly, what do we actually know about Amazon’s preparedness for its retail "assault” in Australia? Arguably, only three things. Firstly, they have invited small/specialty retailers to register to participate in the Amazon Marketplace - Amazon’s online platform for third party sellers. Next, they have taken a lease over a warehouse/distribution centre in Dandenong South in Melbourne’s south east. And thirdly, they have applied to register several patents in Australia.

In summary, not a lot. Hopefully, we will know a little more after today.

In regards to the fear factor, the Amazon “assault” has certainly taken a toll on the share prices of Australia’s major listed retailers. Since the start of the year, JB Hi-Fi’s share price has fallen by 20.4% from $28.04 to $22.31, Harvey Norman is off by 24.1% from $5.15 to $3.91, and Super Retail Group (the owner of stores under the Amart, Rebel and SuperCheap Auto brands) is off by 22.7%. Myer has almost halved to $0.71 ( for other reasons as well as Amazon), while Myer’s suitor, Premier Investments, which operates stores under the Just Group, Peter Alexander and Smiggles brands, is down by 4.4%. All this in a stock market which has risen by 5.7% this year.

Professional short sellers have led the charge, making retail stocks the most “short sold” sector on the ASX. According to the latest daily figures from ASIC, JB Hi-Fi is the fourth most shorted stock with 15.86% of its ordinary shares, or 18.3 million shares, worth around $410 million sold short. Harvey Norman makes it into 14th place with 9.44% of its shares sold short.
                                               

What do the brokers say

The major brokers see value in the retailers, but like the rest of the market, share considerable fears about the impact of Amazon. It is not so much about the timing of Amazon or how aggressively they roll out their range of products, but in the short term, the impact on the retailers’ cost base as they invest in service, technology and logistics to compete, and over the medium term, the impact on margins as price competition intensifies.

Excluding Myer, the other major discretionary retailers are each trading below the broker consensus target price. According to FN Arena, the upside potential ranges from 15.3% for Super Retail Group to 5.9% for Harvey Norman.

On near term pricing multiples around 10 - 11 times forecast earnings, the stocks look cheap. Forecast dividends are yielding in excess of 6% (fully franked).


How to play
Although the discretionary retailers are cheap, there is nothing to say that they can’t become cheaper still.  Because the market knows that Amazon has very deep pockets and expects it to be around for the long term, it doesn’t really matter whether Amazon opens for business in Australia today or not till next March. The Amazon scare isn’t going to go away.

For value buyers, the clue could be to follow the shorters. These professionals have been “on the money” with the whole Amazon scare - early to take positions, patient, and sellers into any rallies. If, and when, the shorters start to close their positions, this is could be the clue for others to buy.
Watch the shorters.
 
Disclosure: The author and his SMSF own shares in JB Hi-Fi.

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Published: Thursday, November 23, 2017


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