Why Online Retailers Will Thrive During the Holiday Season

Over the past few months, a sense of doubt over the holiday shopping season set in. Disappointing consumer-related economic reports and a sluggish recovery in the labor market suggested that retailers wouldn't enjoy happy holidays. Naturally, online retailers such as Amazon.com (NASDAQ: AMZN  ) , eBay (NASDAQ: EBAY  ) , and Overstock.com (NASDAQ: OSTK  ) top the list of companies reliant on fourth-quarter sales.

Thankfully, economic data has turned around, and the outlook for consumer spending looks promising as 2013 draws to a close. As a result, investors should be confident in the fourth-quarter prospects of Amazon, eBay, and Overstock.

The consumer to the rescue
Consumer confidence waned last month, causing doubts as to whether shoppers would pinch pennies this holiday season. U.S. consumer sentiment unexpectedly dropped in November to a near two-year low, signaling that Americans were still very concerned over their job prospects and financial outlooks.

Fortunately, economic reports pertaining to the U.S. consumer got much better this month. This could not come at a better time for online retailers, because they need the consumer feeling flush with cash as the holiday season sets in.

First, the Labor Department reported that the U.S. added 203,000 jobs in November. This beat expectations, and the U.S. unemployment rate fell to a five-year low. Furthermore, personal spending rose 0.3% in October, which also came in better than expected. And, the consumer sentiment index jumped for December.

Online retail stands to win big
Positive consumer-oriented economic data adds to the bullish case for online retailers, which have generally performed well so far this year. They are registering growth in 2013, but will need good results in the fourth quarter to keep the momentum going. For example, Amazon's numbers blew past estimates, with quarterly revenue soaring 24%. In all, Amazon generated $17 billion in net sales during the quarter.

Amazon stands to benefit from an improved outlook for consumers, as the company doesn't know what to expect this holiday shopping season. After providing third-quarter results, Amazon's fourth quarter forecast was fairly vague. It expects anywhere between 10% and 25% revenue growth year over year. Consumers feeling better about their financial standing means Amazon has a greater chance of hitting the high end of its guidance.

eBay booked revenue and non-GAAP earnings-per-share growth of 14% and 17%, respectively, in the third quarter. And, it generated more than $1 billion in free cash flow, up 28% year over year.

In particular, PayPal continued to be a major source of strength for eBay. It's clear that PayPal is eBay's best asset, and will have to carry some weight if eBay is to have a strong fourth-quarter. Key metrics showed PayPal's strength in the third quarter, so there are plenty of reasons to be optimistic. Revenue increased 19%, total payment volume grew 25%, and the service ended the third quarter with 5 million additional active accounts.

Meanwhile, Overstock grew revenue by 18% and diluted EPS by 27%. In addition, the company's margins expanded. Overstock earned a 19.6% gross margin during the quarter, representing a 140 basis-point increase. As Overstock enters the holiday shopping season, it's counting on its Club O program to boost results.

Management believes it offers consumers the most generous loyalty program on the Internet, with incentives such as free shipping and rewards on products. Overstock will need this to be true in order for it to keep growing through the end of the year.

The bottom line
Heading into December, there was reason to be concerned over the crucial holiday shopping season. Consumer data in recent months has been disappointing, sending up red flags over the fourth-quarter outlooks for online retailers.

Thankfully, the strong November jobs report and upbeat December consumer sentiment index indicate the consumer may actually be in the mood to spend, and just in time for the holidays. If that's the case, it will mean great things for Amazon, eBay, and Overstock.

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4/22/2014 4:00 PM
AMZN $329.32 Down -1.55 -0.47%
Amazon.com CAPS Rating: ***
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eBay CAPS Rating: ****
OSTK $18.85 Up +0.34 +1.84%
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