Amazon is primed to start spending, but perhaps more for growth than for pandemic protection as Jeff Bezos suggested in Q1 2020.
When Amazon (NASDAQ:AMZN) released its first-quarter results, Jeff Bezos warned that investors were in for a bumpy ride in Q2.
The reason he said was the global pandemic— the company would need to spend more than it makes in the coming quarter. At the time, it sounded like Mr. Bezos was referring to spending on protective equipment and new safety measures that ultimately wouldn’t help the business grow.
But new rumors that Amazon is in talks to buy beleaguered department store JC Penney (NYSE:JCP) suggest Bezos is planning a different, more investor-friendly kind of spending. According to WWD, the two companies are discussing a potential acquisition that would expand the e-commerce giant’s private label apparel line.
It makes sense considering JCP stock is currently trading at 16 cents per share and the department store chain owns a substantial real estate portfolio that Amazon could convert into brick-and-mortar stores. Amazon’s own apparel brands have been gaining traction, but without physical locations that allow customers to see and feel the merchandise, there could be a ceiling to their popularity.
While the obvious reason for a JCP acquisition is brand expansion, there could be another reason Amazon is interested in the beaten-down department store.
Amazon’s distribution network is another colossal growth avenue for the firm, especially now that online shopping has seen a pandemic-related boost. Amazon may be interested in using JC Penney’s footprint to create smaller, satellite distribution centers.
Right now, focusing on expanding its distribution network is probably the right move for Amazon. The firm has been struggling with last-mile costs due to its shipping policies. In the e-comerce space, shipping has become a key battleground and Amazon’s lack of physical store presence could be a weakness.
Competitors like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) offer click-and-collect options which are not only cheaper for the stores, but often faster for consumers as well.
If Amazon were to take over JCP locations, the firm could use them as pick-up portals where customers could retrieve orders. That would not only fit in with AMZN’s efforts to cut down on delivery costs, but it would also align with the firm’s commitment to lowering its emissions.
JCP isn’t the only place Amazon is likely looking to make a big purchase, though. Bank of America’s Justin Post pointed out Tuesday that with the price of aircraft near all-time lows, Amazon might be considering taking on more cargo planes. Post says now is a good time for Amazon to push forward on its efforts to expand its fleet of airplanes.
With aircraft values possibly depressed for several years…and cargo yields increasing, it may be cost-effective for Amazon to expand its aircraft fleet sooner rather than later
According to a DePaul University study, Amazon is planning to up its fleet of 42 planes to 70 by 2021. That figure is said to rise further to 200 by the end of the decade. That would put Amazon squarely in competition with other delivery services— DHL operates 77 planes and UPS has a fleet of 275 planes.
It seems counterintuitive for Amazon to expand its brick-and-mortar presence at a time when many are questioning whether social distancing is here to stay. There’s no question that the trend toward e-commerce was accelerated by the pandemic, and that’s unlikely to fade when restrictions lift.
With that in mind, AMZN’s spending in the coming quarter is likely to center around distribution as the firm works to protect workers in a way that will also translate into future growth.
Disclaimer: As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities. This article represents the author’s opinion and should not be considered investment advice from CCN.com.
Last modified: September 23, 2020 1:58 PM