Amazon (AMZN 3.89%) already announced it had a record holiday season. But in true Amazon form, the company said a whole lot without giving any details at all.
As quarterly reports from competing retailers trickle in, some bigger competitors provide pre-release updates, and market research groups provide their own estimates, it's been impossible not to notice Amazon's impact on the industry. All signs point to a very good fourth quarter for the online retail giant.
The latest update from the National Retail Federation points out that overall holiday sales were strong. Retailers sold 4.1% more in November and December of 2019 compared to 2018, coming in at the top end of NRF's forecast for 3.8% to 4.2% growth. E-commerce sales were particularly strong, growing 14.6% year over year, above the top end of NRF's forecast.
That's really good news for Amazon investors.
Image source: Amazon
Winning market share
Analysts currently expect Amazon to report overall revenue growth of 18.7% for the fourth quarter, faster than NRF's estimate for overall onlines sales growth. While that includes fast-growing segments like its cloud computing and advertising businesses, the bulk of Amazon's sales come from its marketplace.
Importantly, NRF's report indicates outperformance from online sales, and Amazon is typically the biggest beneficiary when online sales grow. Despite its dominance of the market, it continues to expand its market share. Not only that, early reports from Target (TGT +2.43%) -- one of Amazon's biggest e-commerce competitors -- showed a marked slowdown in digital sales growth, even while Amazon has experienced an acceleration in marketplace sales after introducing its one-day Prime shipping benefit.
Meanwhile, some of the weakest performers, according to NRF's report, were electronics and appliance stores. Target also noted weakness in electronics, with sales declining 3% year over year in the category.
That doesn't bode well for specialty retailers like Best Buy (BBY 0.11%), but it could mean some of those sales shifted to more general-merchandise online marketplaces like Amazon. Best Buy is a sizable e-commerce competitor, but its advantages over Amazon (namely same-day, in-store pickup) are starting to disappear with Amazon's introduction of one-day shipping.
Watch out for weak profit outlook
When Amazon reports its fourth-quarter earnings at the end of January, investors might be happy with the company's holiday sales, but the earnings outlook for 2020 could disappoint. Amazon is investing heavily in various aspects of its business, notably logistics and grocery.
Amazon hasn't hidden the fact that one-day shipping is expensive. It said it'll invest $800 million in one-day shipping in the second quarter, and that number climbed higher in the third quarter. Fourth-quarter shipping expenses -- Amazon's busiest time of year -- likely skyrocketed. Amazon's investing in its own logistics network in order to reduce overall expenses in the long run, though, which could eventually turn into a significant source of revenue in and of itself.
Meanwhile, Amazon has been a bit more quiet about its grocery investments. It's testing a new grocery chain starting in California with the potential to expand nationally. That's on top of the continued expansion of Whole Foods Market and its Amazon Go convenience stores. Grocery sales stood out among other retail categories in NRF's report, up 2.9% year over year, better than any other category.
Amazon is in a new phase of investment, which will drag down profits for the foreseeable future. Morgan Stanley analyst Brian Nowak thinks his colleagues are too optimistic about Amazon's profit potential for 2020. Bank of America Global Research analyst Justin Post agrees investments in shipping and grocery will be deeper than other investors expect.
Amazon investors should cheer management's big investments in shipping and grocery, though, as they exemplify management's focus on maintaining growth, grabbing market share, and expanding into profitable ancillary businesses to subsidize its low-margin retail operations, like logistics. That should be readily apparent in the company's fourth-quarter report, which will likely feature strong top-line growth but weak bottom-line guidance for 2020.
