Become an expert in less than five minutes: That's what a Motley Fool Cheat Sheet is all about. If you're new to Amazon.com (Nasdaq: AMZN), consider this your Foolish way to get introduced and in the know.
What it does
While the Kindle probably dominates our collective subconscious' recent memory of Amazon's exploits, the company's true claim to fame is its absolute dominance of e-commerce. Simply put, Amazon is the Wal-Mart (NYSE: WMT) of the Internet. Its website, www.amazon.com, is an online retail portal for everything from toys, clothes, and auto parts to computers and, of course, books, its first love.
An MBA might tell you that the main contributor to Amazon's success is its ability to leverage its enormous scale and the efficiencies it derives by not having to operate any physical storefronts. He wouldn't be wrong. But he'd be missing the key point, which is that Amazon takes all the profits those "efficiencies" drive and plows them back into making a better experience for its customers. It invented free shipping (which isn't free to Amazon), it allowed other merchants to sell on its site (in direct competition with its own products), and it even warehouses and ships products for those merchants.
How it stacks up
Comparing Amazon to its retail competitors is difficult because traditional, physical store-based metrics don't apply. However, certain operating metrics like gross margins (how much of a markup a company can command), its average cash conversion cycle (the number of days for a company to turn its inventory into cash from customers), and its annual inventory turnover (the number of times in a year a company's inventory is sold and replaced) can give an indication of how well-run Amazon is compared to its peers.
|
Company |
3-Year Revenue Growth Rate |
Gross Margin |
Cash Conversion Cycle (days) |
Inventory Turnover (times/year) |
Debt/Capital |
|---|---|---|---|---|---|
|
Amazon.com |
33% |
23% |
-37 |
11x |
2% |
|
Costco (Nasdaq: COST) |
6% |
13% |
0 |
12x |
17% |
|
Overstock.com (Nasdaq: OSTK) |
(4%) |
18% |
-21 |
30x |
63% |
|
Macy's (NYSE: M) |
8% |
41% |
77 |
3x |
80% |
|
Staples (Nasdaq: SPLS) |
10% |
30% |
27 |
7x |
27% |
|
Target (NYSE: TGT) |
3% |
30% |
48 |
6x |
50% |
|
Wal-Mart |
5% |
25% |
9 |
9x |
41% |
Source: Capital IQ as of July 15, 2010.
Why you should care
Frankly, it takes true guts to invite your competitors into your own home. And not just guts, but brains -- brains to see that at the end of the day, not only would it not hurt you, but it would actually help you. No other retailer is as innovative and forward-looking as Jeff Bezos (even legendary Costco CEO Jim Sinegal admires him).
Amazon's motto is to be Earth's most customer-centric company. In the industry where "the customer is always right," this isn't just some touchy-feely baloney. It's at the very core of why the company has been able to multiply its revenue by 166 times over the past 12 years. Amazon believes that the more it gives to its customers, the more its customers will keep coming back and give to Amazon. And give, boy have they given.
