Last week we received the disappointing June retail sales report, which pointed toward another reduction in gross domestic product (GDP) expectations for the second quarter and highlighted the ongoing pain for bricks-and-mortar retailers, especially department stores such as Macy's Inc. (M) and JC Penney Co. (JCP) . Digging into the report, we noticed month-over-month declines almost across the board, but one of the larger drops was in -- you guessed it -- department stores, which fell 3.9% year over year. By comparison, sales of nonstore retailers -- code for e-commerce retailers -- such as Amazon.com Inc. (AMZN) rose 9.7% year over year. (Amazon is part of the Trifecta Stocks portfolio.)
Besides reporting on June sales, the latest retail report recaps second-quarter data, which was no better for the bricks-and-mortar crowd. While nonstore retailer sales rose more than 10% in the quarter year over year, sales at department stores fell more than 10% and sales in the sporting goods, hobby, book and music store category dropped nearly 6%. Keep in mind that Nike Inc. (NKE) only recently partnered with Amazon to leverage its second-to-none logistics as Nike looks to reduce its reliance on third-party retailers such as Foot Locker Inc. (FL) and grow its higher-margin Direct-to-Consumer business. It's yet another reason to expect declining mall traffic in the coming months, especially if more branded apparel companies look to partner with Amazon --and yes, we expect that to happen.
This week, Amazon sent more than a flare across the bow of newly public meal kit company Blue Apron Holdings Inc. (APRN) with revelations that the company is taking more steps toward expanding its food-focused efforts. Recent trademark filings that have become public show Amazon is looking to attack the growing meal kit business and has trademarked the phrases "We do the prep. You be the chef," "We prep. You cook" and "No-line meal kits."
Looking into the filings, the described service tied to these trademarks is "Prepared food kits composed of meat, poultry, fish, seafood, fruit and/or and vegetables and also including sauces or seasonings, ready for cooking and assembly as a meal; Frozen, prepared, and packaged meals consisting of meat, poultry, fish, seafood, fruit and/or vegetables; fruit salads and vegetable salads; soups and preparations for making soups."
It sure looks like Amazon is looking to leverage its growing presence in food, and our Food with Integrity investing theme, to capitalize on the growing meal kit business that led Blue Apron to go public. Looking back over the last few years, we see this push as a natural extension of its food efforts that began in 2013 with the launch of Amazon Fresh for groceries, followed by Amazon Restaurants for restaurant delivery in 2014. Of course, the pending acquisition of Whole Foods Market Inc. (WFM) is the key ingredient (see what we did there) to rounding out its position in the meal kit business and tapping the $800 billion grocery business.
This announcement paired with others that include Amazon's move into the apparel industry bolster its already-strong position for the quarters to come.
Now for a word of caution: Of late, it seems that Amazon can do no wrong, and in our view this sets up pretty high expectations for the company's second-quarter earnings and outlook for the second half of 2017, which includes the back-to-school and holiday shopping seasons.
One of the few places the herd gets tripped up with Amazon is on the cost side of the equation, particularly when it comes to investing for growth. Given the number of initiatives Amazon has in place, we think there is a meaningful probability that Amazon boosts its investment spending estimate near term when it reports its quarterly results on July 27. If we're right, it could lead to a pullback in the shares, especially because Amazon tends to be rather tight-lipped when it comes to details on its earnings conference calls. We would look to scale into AMZN shares between $820 and $870; that would be a drop of roughly 15% to 20% from current levels, which tends to be the range by which high-profile stocks such as Amazon are hit if they come up short on earnings or guidance.
We continue to see Amazon as a long-term wallet-share gainer as it continues to expand its umbrella of service offerings and its geographic footprint while benefiting from the adoption of its high-margin cloud business. Our price target remains $1,150. And as we have said before, Amazon is company that is to be owned, not traded.
(This commentary was originally sent to Trifecta Stocks subscribers at 8:42 a.m. ET on July 19. Click here to learn about this newsletter.)