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发帖时间:2024-09-29 12:24:52
Soon after
Amazon
(NASDAQ: AMZN)
acquired Whole Foods Market in 2017,haven't heard back from apartment application it started offering discounts to Amazon Prime members and selling Amazon devices in stores. In 2018, Amazon introduced free grocery delivery for Prime members at select locations and enabled online shoppers to pick up orders at their nearby Whole Foods location.
2019 might be the year Amazon starts building new Whole Foods locations. The company is planning stores in more suburban locations in the Rocky Mountain region, according to a report from the
Wall Street Journal
. The stores will also be bigger than the average Whole Foods location, providing additional space for Amazon to store additional products and offer online order pickup services. That's a key synergy provided by the Amazon acquisition that could enable Whole Foods to expand to more locations.
A woman pushing a shopping cart in front of a Whole Foods Market sign.
Image source: Whole Foods Market.
All about Prime Now
Amazon has over 100 million Prime members around the world, but
member growth
has stagnated in the United States. Amazon continues to invest in benefits for its Prime members, including those offered at Whole Foods. That's enabled it to raise the price of Prime to $119 per year, which still presents great value to customers.
One benefit Amazon is working to expand is Prime Now, its two-hour delivery service for select items. It's currently available in about 60 cities.
Building out new Whole Foods locations that can double as distribution centers for Prime Now deliveries can make the expansion of Whole Foods much more economical. While Whole Foods might have been challenged to create profitable stores in more suburban locations on its own, Amazon can utilize the space to boost online sales from its marketplace as well.
Whole Foods' expansion has slowed since 2014 when it added a record 38 stores. In it 2016 annual report, management wrote, "We believe it is prudent in this challenging food retailing environment to lower our year-over-year square footage growth."
Amazon also brings a willingness to invest in less profitable areas that Whole Foods didn't have as a stand-alone company. Amazon can invest in those areas because it can gain benefits from scale and has proven capable of maximizing the value of its infrastructure (see Amazon Web Services, Fulfillment by Amazon, Prime Video, et cetera).
Bringing the competition
Whole Foods currently accounts for just 3% of the U.S. grocery market. Its footprint is relatively small compared to grocery giants like
Walmart
(NYSE: WMT)
and
Kroger
(NYSE: KR)
. Walmart has over 4,800 locations selling groceries in the U.S. Kroger has over 2,700 grocery locations. Amazon has just 450 Whole Foods locations in the U.S.
Expanding into territories with fewer grocery options presents a major opportunity for Amazon and Whole Foods. Amazon is willing to take slim profits (or even losses) in order to take market share from its competition.
Instead of trying to compete on price with Whole Foods, however, Amazon will compete on service, offering online order pick-up and delivery for customers, putting
pressure
on Walmart and Kroger to continue expanding those services. Kroger is already struggling to keep up with the pressure it currently sees from Whole Foods and the rest of the industry while Walmart has made considerable price investments negatively impacting profits.
Amazon's strategy to expand Prime services by combining new Whole Foods stores with small distribution centers gives it a huge advantage over the competition when it comes to buying up real estate and opening new stores. The competition will be hard-pressed to replicate those economics, and it could show up in their profit margins as Amazon expands.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors.
Adam Levy
owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a
disclosure policy
.
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As shown below, the results in the quarter materially changed the trend in two-year stacked comps for each of the banners, along with a significant acceleration for consolidated comps.
The increase in consolidated comps was the primary driver of an 8% increase in revenues to $6.3 billion. The company ended the quarter with 15,370 locations, up less than 1% year-over-year. This reflects a 7% increase in Dollar Tree units, offset by a 4% decline in Family Dollar units.
The top-line results at each banner flowed through to their respective income statements, with Dollar Tree gross margins and operating margins declining year-over-year while Family Dollar gross margins and operating margins expanded year-over-year. On a consolidated basis, gross margins contracted by 120 basis points in the quarter to 28.5%, reflective of a shift to lower-margin consumables, tariff costs and the impact of markdowns from the Easter headwinds at the Dollar Tree banner. The company saw slight operating leverage on SG&A from higher comps, with the net result being an 80 basis point contraction in operating margins to 5.8%, with operating income declining 5% to $366 million. This is not adjusted for $73 million of pandemic-related costs, such as PPE supplies.
In the first quarter, the company opened 85 stores (net of closures) and completed 220 Family Dollar renovations to the H2 format. Importantly, comps at renovated Family Dollar stores continue to outpace the chain average by more than 10%. On the call, management indicated that they plan on reducing both the number of new store openings (from 550 to 500) and the number of H2 renovations (from 1,250 to 750) in 2020.
Personally, given the fact that Family Dollar is seeing material benefits to its business from the pandemic with new or lapsed customers coming into its stores, I think the company should try to get more aggressive with its renovation plans, not less. On the other hand, you could argue that renovations cause short-term disruptions and limit their ability to fully capitalize on the business momentum they are currently experiencing.
As a result of fewer new stores and remodels, management now expects 2020 capital expenditures to total $1.0 billion compared to previous guidance of $1.2 billion. In addition, the company has temporarily suspended share repurchases. At quarter's end, the company had $1.8 billion in cash on its balance sheet compared to $4.3 billion in total debt.
Conclusion
In recent years, Dollar Tree has been a tale of two cities. While its namesake banner has generally delivered impressive financial results, Family Dollar has been a persistent underperformer. This quarter, those results flipped, and given what we've seen in the weeks since quarter's end, there's a decent possibility that we will see something similar in the coming months. As the CEO noted, the second quarter is off to a very good start at Family Dollar.
Here's the important question: how useful is that information is in terms of making future predictions about the business? Will recent success at Family Dollar translate into long-term success for the banner? The optimistic take is that new or lapsed customers, especially those visiting the renovated stores, could become recurring business for the banner. The pessimistic take is that they have experienced short-term success out of necessity as people went to any store that was open to try and find essentials like toilet paper and hand sanitizer that were largely out of stock throughout the retail landscape. From that view, many of these customers could abandon the retailer when life returns to normal. As Philbin noted on the conference call, early on [during the pandemic], folks needed us. Will people still shop as much at Family Dollar when it's no longer a necessity?
Personally, I do not place too much weight on the recent results. I will need to see incremental data points that indicate that Family Dollar has truly won sustained business from these new customers. While I still believe that the Dollar Tree banner is a well-positioned retailer with attractive unit returns, I'm not yet willing to say the same thing for Family Dollar. For that reason, along with the recent run-up in the stock price, I plan on staying on the sidelines for now.
Disclosure: None
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