There have been a torrent of income investing articles here at SA on traditional brick-n-mortar (B&M) retailers as well as the retail REITs that own their retail space, concerned with the ability of these retail stores and retail REITs to sustain their dividends. The threat to the retail establishment is lower prices, convenience and good service from the on-line shopping experience provided by the likes of Amazon.com (AMZN). But doesn’t Amazon.com itself carry considerable and perhaps growing overhead in the form of expansive inventory, warehouse automation and shipping costs that could equal or exceed traditional B&M operational costs? Is AMZN able to generate continuing positive cash flows while under-pricing its B&M competition? Or is Amazon overextending itself such that it will have to gradually raise prices, reduce free shipping and charge more for Prime membership, thus giving back part of its market share to B&M? As always, the trend in the flow of cash is one of the best measures of sustainability and growth, so let’s take a look…..
Cash Flow Analysis
AMZN does not pay a dividend, so CF analysis will only look at metrics not associated with the dividend. All metrics are a rolling 4Q average designed to show CF trends.
As can be seen, AMZN revenue per share has been steadily increasing, a favorable trend. However, growing revenue does not necessarily mean higher profitability. To determine this requires going to the next step….
Although this chart has flattened out over the past two 4Q periods, it is definitely trending higher. But is the growth in net cash flow from operations (CFFO) keeping up with revenue growth? The best metric to track this is the managerial efficiency ratio, or the CFFO divided by the Revenue, using a rolling 4Q average.
This metric measures how much of the company’s revenues management is able to convert into operational cash that management can then use to pay for new investing activities (acquisitions), pay down debt, buy back stock or other activities. At 11 – 12% over the past 10Q, this ratio has been very stable and favorable for a retail company. Departments stores such as Macy’s (M), Kohl’s (NYSE:KSS) and Sears (SHLD) will run in the 5-9% range.
What about the effect of debt? I measure this by dividing the stated interest expense by the CFFO with the interest expense added back, again using rolling four quarters.
As can be seen, the interest expense has been negligible when compared with AMZN’s net operational cash flow, so debt has been a non-issue for AMZN.
Finally, how able is AMZN to fully cover new investing activities with net operational cash?
This metric is perhaps the most important in demonstrating a company’s ability to generate sufficient cash to cover its growth without going to debt or equity sales. This is the only downward trend of AMZN cash flow numbers over the past 10 quarters. There are several possible reasons for this declining ability to fully cover the cost of new investments with net operational cash, but the most likely cause is product/service lines are being added that are not providing the return of earlier investing activities. This can happen when a company with a strong cash flow history and a build-up of cash and cash equivalents (C&CE) finds that new ideas are getting harder to come up with yet the institutional investors are urging the company to “get that cash to work,” pressuring the company to acquire investments it otherwise would pass over. The recent $13.7B purchase of Whole Foods (WFM) may be an example of this.
This chart shows the relationship between cash reserves and spending on new investing activities, or the consolidated funds used for investing activities. It would seem AMZN management would prefer to acquire major investments with cash rather than issuing debt or equity. Indeed, over the past 10Q, AMZN has redeemed a net of $9.1B in debt.
AMZN does indeed generate lots of cash with no sign of letting up. With little debt, no dividend and a history of innovation, it seems no retail brand is exempt from Amazon engineering science that will figure out how to provide it to the consumer better, faster and cheaper. The only trending suggesting AMZN may be slowing is the decreasing percentage of CFFO available for buying new investments. This is not a major concern….just a slowing. Whether temporary or a longer term trend, we’ll have to wait and see.
But the strength of Amazon’s CF growth make it clear that conventional retail B&M, and the dividends they pay, have cause for concern.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.