Tag Archives: cost

Amazon Looks Primed To Disrupt Wal-Mart, Target, CVS, Walgreens

A major expansion by Amazon.com ( AMZN ) into private-label goods, which could come this month, elevates its ability to further challenge legacy retailers across the board. Cowen analyst John Blackledge estimates Amazon will be the No. 2 player in the $425 billion consumable market, excluding food and beverage, surpassing  Walgreens Boots Alliance ( WBA ), CVS Health ( CVS ) and Target ( TGT ) but still lagging well behind market leader Wal-Mart ( WMT ). He defines consumables as four segments: personal care products, household products, baby products and pet products. Blackledge also estimates Amazon will be a top-10 player in the $785 billion food and beverage grocery market by 2019. “We are encouraged by Amazon’s growing footprint in this category, which we see as ripe for potential disruption, given younger demos increasingly purchasing grocery items via digital channels,” Blackledge wrote. The leader in the food and beverage category is Wal-Mart, followed by Kroger ( KR ), Albertsons/Safeway and Costco Wholesale ( COST ). Last week, the Wall Street Journal  cited people familiar with the matter as saying Amazon is set in the coming weeks to roll out new lines of private-label brands that will include its first broad push into perishable foods. According to the Private Label Manufacturers Association, sales of private-label store brands in the U.S. topped $118 billion in 2015, with supermarkets and drug chains accounting for over $70 billion of the total. In the grocery and consumables market, Blackledge says, Amazon’s growth has come at the expense of Wal-Mart, Target. Walgreens and CVS. Amazon’s key competitive advantage is its multiplatform approach with Amazon Prime, which includes same-day delivery for many goods, “all of which should lead to rising number of consumers skipping the trip to the local supercenter, drug store or grocery market,” he wrote. Amazon has sold private-label products since 2009, primarily under the AmazonBasics brand, though that effort has concentrated largely on consumer electronics. Amazon stock rose 0.6% to 702.80 in the stock market today . Amazon stock hit an all-time high of 722.45 on May 12. It carries a strong IBD Composite Rating of 94, putting it among the top 6% of all stocks on key metrics such as revenue growth. Walgreens climbed 1.3% but CVS fell 1.5%. Target climbed 2.4%. Wal-Mart advanced 1%, hitting a nine-month high intraday, after spiking nearly 10% Thursday on strong earnings and same-store sales.

Hedging Disney Ahead Of Earnings

If guests have the nerve to die, they wait, like unwanted calories, until they’ve crossed the line and can do so safely off the property. – The Project On Disney, via Snopes Disney: Estimize Versus Value Investor’s Edge With Disney (NYSE: DIS ) reporting earnings after the close, the nearly 1,200 Disney analysts reporting to Estimize collectively predict the company will beat Wall Street’s consensus earnings estimate, as the graph below shows. Click to enlarge The Estimize consensus earnings estimate shown above, $1.46, is 6 cents ahead of the Wall Street consensus of $1.40. Since its analysts include private investors as well as those from independent research shops, buy-side firms, and sell-side firms, Estimize says its estimates tend to be more accurate than those from Wall Street analysts alone. On the bearish side is Seeking Alpha premium author J Mintzmyer, who runs the Seeking Alpha Marketplace service Value Investor’s Edge . In a Pro Research column ( Time To Short Disney ), Mintzmyer argued the stock was “horribly expensive” (in the comments, Mintzmyer clarifies that, while he still finds the stock overvalued, he is no longer short Disney and feels there are better short opportunities available now). Limiting Downside Risk For Disney Longs For Disney longs boosted by the bullish Estimize earnings prediction, but looking to hedge their downside risk over the next several months, we’ll look at a couple of ways of doing so below the refresher on hedging terms. Refresher On Hedging Terms Recall that puts (short for put options) are contracts that give an investor the right to sell a security for a specified price (the strike price) before a specified date (the expiration date). And calls (short for call options) are contracts that give an investor the right to buy a security for a specified price before a specified date. Optimal puts are the ones that will give you the level of protection you want at the lowest cost. A collar is a type of hedge in which you buy a put option for protection, and at the same time, sell a call option, which gives another investor the right to buy the security from you at a higher strike price by the same expiration date. The proceeds from selling the call option can offset at least part of the cost of buying the put option. An optimal collar is a collar that will give you the level of protection you want at the lowest cost while not capping your possible upside by the expiration date of the hedge by more than you specify. In a nutshell, with a collar, you may be able to reduce the cost of hedging in return for giving up some possible upside. Hedging Disney With Optimal Puts We’re going to use Portfolio Armor’s iOS app to find an optimal put and an optimal collar to hedge Disney, but you don’t need the app to do this. You can find optimal puts and collars yourself by using the process we outlined in this article if you’re willing to take the time and do the work. Whether you run the calculations yourself using the process we outlined or use the app, an additional piece of information you’ll need to supply (along with the number of shares you’re looking to hedge) when scanning for an optimal put is your “threshold”, which refers to the maximum decline you are willing to risk. This will vary depending on your risk tolerance. For the purpose of the examples below, we’ve used a threshold of 15%. If you are more risk-averse, you could use a smaller threshold. And if you are less risk-averse, you could use a larger one. All else equal, though, the higher the threshold, the cheaper it will be to hedge. Here are the optimal puts as of Monday’s close to hedge 200 shares of DIS against a greater-than-15% drop by late October. As you can see at the bottom of the screen capture above, the cost of this protection was $424, or 2.01% of position value. A few points about this hedge: To be conservative, the cost was based on the ask price of the put. In practice, you can often buy puts for less (at some price between the bid and ask). The 15% threshold includes this cost, i.e., in the worst-case scenario, your DIS position would be down 12.99%, not including the hedging cost. The threshold is based on the intrinsic value of the puts, so they may provide more protection than promised if the investor exits after the underlying security declines in the near term, when the puts may still have significant time value . Hedging Disney With An Optimal Collar When searching for an optimal collar, you’ll need one more number in addition to your threshold, your “cap,” which refers to the maximum upside you are willing to limit yourself to if the underlying security appreciates significantly. A logical starting point for the cap is your estimate of how the security will perform over the time period of the hedge. For example, if you’re hedging over a five-month period, and you think a security won’t appreciate more than 6% over that time frame, then it might make sense to use 6% as a cap. You don’t think the security is going to do better than that anyway, so you’re willing to sell someone else the right to call it away if it does better than that. We checked Portfolio Armor’s website to get an estimate of Disney’s potential return over the time frame of the hedge. Every trading day, the site runs two screens to avoid riskier investments on every hedgeable security in the U.S., and then ranks the ones that pass by their potential return. Disney didn’t pass the two screens, do the site didn’t calculate a potential return for it. So we looked at Wall Street’s price targets for the stock via Yahoo Finance (pictured below). We usually work with the median target, but in this case, it’s pretty low relative to the price of the stock. The $110.50 12-month price target represents about a 2% potential return between now and late October. On the other hand, the high target of $130 implies a return of about 9.6% over that time frame. By using a cap of 9%, we were able to eliminate the cost of the hedge in this case, so we used that. As of Monday’s close, this was the optimal collar to hedge 200 shares of DIS against a greater-than-15% drop by late October while not capping an investor’s upside at less than 9% by the end of that time period. As you can see in the first part of the optimal collar above, the cost of the put leg was $328, or 1.56% of position value. But if you look at the second part of the collar below, you’ll see the income generated by selling the call leg was a bit higher: $364, or 1.73% of position value. So, the net cost was negative, meaning an investor opening this collar would have collected an amount equal to $36, or -0.17% of position value. Two notes on this hedge: Similar to the situation with the optimal puts, to be conservative, the cost of the optimal collar was calculated using the ask price of the puts and the bid price of the calls. In practice, an investor can often buy puts for less and sell calls for more (again, at some price between the bid and the ask), so in reality, an investor would likely have collected more than $36 when opening this collar. As with the optimal puts above, this hedge may provide more protection than promised if the investor exits after the underlying security declines in the near future, due to time value (for an example of this, see this recent article on hedging Apple (NASDAQ: AAPL ), Hedging Apple ). However, if the underlying security spikes in the near future, time value can have the opposite effect, making it costly to exit the position early (for an example of this, see this article on hedging Facebook (NASDAQ: FB ), Facebook Rewards Cautious Investors Less ). Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

How E-Tail Startup Jet.com Is Taking On Giant Amazon.com

With a potential $1 billion in 2016 revenue and $803 million in funding, e-tail startup Jet.com has some heft, but it’s still a lightweight compared with e-tail king  Amazon.com ( AMZN ). But that doesn’t faze Jet CEO Marc Lore, who has a strategy, which he laid out for IBD in a phone interview from the company’s Hoboken, N.J., headquarters. It boils down to two big ideas: that e-commerce overall will soar from a $300 billion market to $1 trillion in the next 10 years; and that Amazon can’t possibly take the whole thing. His third point underlying both big ideas is that Jet is targeting shoppers that Amazon is not — those obsessive about saving money. “W e’re going after a different type of customer with a different need,” Lore said. “ We are about saving people money and empowering them to shop in a smarter way. And o ur technology is built to help consumers and retailers pull costs  out of the overall ecosystem. So it is   a more efficient way to buy product.” Jet aims to present shoppers with an experience that more closely matches what they’d find in a store. Every product, for example, has a single view. That’s unlike e-tail giants like Amazon or eBay ( EBAY ), where shoppers are confronted with multiple, competing listings from a number of sellers. Instead Jet.com finds the best price for a given product after searching multiple sellers and displays. So, for example, in a search for Levi’s jeans, a shopper would see a single listing for each style of jeans. The single product view may also help Jet.com avoid the SEO challenges that have plagued eBay , which has a longtime beef with search leader Google. Jet.com Secret Sauce Is ‘Dynamic Pricing’ But the real secret sauce for shoppers is the company’s dynamic pricing. Essentially, customers are rewarded for buying multiple items, which decreases shipping costs and thus decreases customers’ costs. Then, when the customer goes to check out, Jet’s algorithm behind the scenes figures out which sellers are the most efficient in terms of shipping and price, so if one seller is closer but charges more for shipping, you’ll buy from a more distant seller that charges less for shipping and thus results in a lower overall cost for the customer. “Ou r technology is built  more like a real- time trading system than it is an e-commerce site,” Lore said. “A s people shop,  we’re repricing products to reflect the true underlying economics of getting those products to the customer,  based on what products are already in the (checkout)  basket and based on how far away those products are from where the customer lives.” Jet continues to tweak its website. When Lore launched the venture in January 2015, the company used a membership program similar to  Costco ‘s ( COST ) to generate profit. That didn’t last long, and the company changed its business model in October, hiking prices. Though there were reports the change signaled trouble , several analysts interviewed for this report said startups often make strategic changes early on. Amazon’s E-Commerce Empire As shown by its fundraising and number of investors, Jet.com has its believers. Its venture money comes from China e-commerce giant Alibaba ( BABA ), prominent Silicon Valley venture capital firms such as General Catalyst Partners, and the venture units of financial powerhouses Goldman Sachs ( GS ) and  Fidelity National Financial ( FNF ), among others. The company is valued near $1 billion, huge for any startup but a blip compared with Amazon’s $286 billion market cap. Amazon has annual revenue topping $100 billion — not including the more than $131 billion in third-party sales — and is catching up to longtime No. 1 retailer  Wal-Mart ( WMT ). Amazon also has a nascent payments business that competes with PayPal ( PYPL ). To facilitate its e-commerce sales, the company has elected to get into the ocean shipping business, which has the potential to generate hundreds of millions in free cash flow . And that’s just the e-tail business. In E-Tail, Go Big Or Go Home Conventional wisdom holds that one strategy to beat Amazon is to pick and choose categories of goods that Amazon is not strong in. One, for example, is fashion — though Amazon recently launched its own line of apparel and a live-streaming TV show . Alibaba-funded e-tail startup ShopRunner is taking aim at Amazon that way. Lore chose another route. In Lore’s view of the e-commerce universe, mass market firms — those competing across a range of product categories — are the only viable firms. That’s because, Lore says, whether a website is selling one category of products or 10, you need to push them “through the same set of pipes.” And thus, he says, it makes more sense to leverage the same set of fixed costs to increase sales. “If you have 10 times as many categories and 10 times the gross marketplace value going through the same set of pipes, you’re going to get a lot more leverage in your fixed expenses, and your expenses as a percentage of revenue is going to be a lot lower,” Lore said. “It makes it really difficult for the specialty guys to compete on price with mass merchants for that reason.” Lore himself has a fair bit of experience with Amazon and its CEO, Jeff Bezos. As founder and former CEO of Quidsi, known for its Diapers.com, Lore spent years facing off against Amazon. Ultimately, Bezos killed Diapers.com with a price war — the e-tail giant can afford to lose money for longer than its often smaller competitors — and bought the company from Lore. The CEO stuck around for about three years but ultimately left in 2013 . A little more than a year in, Jet.com remains one of the few e-tail companies in the U.S. that’s openly challenging Amazon’s dominance. With $1 billion in gross merchandise value — a figure often very close to revenue for e-tail firms — and 3.5 million registered shoppers, Lore already has taken Jet on a long flight, with a long runway ahead.