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Amazon Earnings Preview: Is the online king buying Sears?!?

Jeff Macke
Breakout

After months of product announcements and price tweaks Amazon (AMZN) will finally talk numbers tonight after the closing bell. Analysts are officially expecting earnings of 23-cents per share on $19.43 billion in revenues. With shares off $75 since Amazon's last earnings report and the company's famous disdain for profits, shareholders are simply hoping for anything better than agonizing.

There's no shortage of questions surrounding the world's largest online retailer. In just the last 3 months Amazon has raised the price of its Prime subscription, secured a deal to stream HBO programs, released a voice-activated set-top box and is still expanding into local delivery.

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Going local is clearly Amazon's biggest opportunity and threat. Amazon Fresh has been in development since 2007, slowly expanding from Mercer Island outside of Seattle to Los Angeles, San Francisco and soon New York. The expansion has some analysts buzzing about Amazon acquiring a failing bricks and mortar chain and creating nationwide Amazon stores. Most recently Amazon was rumored to be considering a buyout of the skeletal remains of Sears and Kmart in order to allow customer to pick up products the same day they place an order.

It won't happen. Though Amazon’s breadth of offerings makes them appear to be a wildcard the company orbits around the twin suns of efficiency and customer service. Over the last 5 years Amazon has spent between 15 and 20 billion dollars building distribution centers nationwide, not including what it's costing to build a $1.2 million ‘Death Star’ in New Jersey. The distribution centers are built with automation and standard systems in their core. The company doesn't care if it’s shipping a book or a head of lettuce as long as it can program a drone to pluck it off a shelf and get it to the customer ASAP.

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The idea of Amazon buying Sears has surface appeal because it would give Amazon an immediate physical presence. Even after 20 years of flailing there are still nearly 2,500 Sears and Kmart stores in North America. For less than $10 billion Jeff Bezos could be coast to coast overnight. Unfortunately the fit couldn't be worse. Sears as a collective is everything Amazon abhors. Sears is a hodgepodge of 2,500 random store models in sub-par locations and in a general state of disrepair. According to Harris Interactive Sears ranks 46 of 60 in consumer perception. Amazon is number 1. As far as customers are concerned Sears and Kmart locations are cursed. They have the re-sale value of the neighborhood in Poltergeist.

When Amazon expands locally it will do so at a measured pace and with premier locations. The entire Amazon capital structure and company value proposition hinges on its reputation. Buying Sears would immediately tarnish the Amazon brand and take $100 out of the stock. Amazon missed expectations by a country mile last quarter. As a shareholder I'm going into tonight's call prepared for almost anything. Almost. The only thing Amazon could say that would stun, disappoint and disturb me to the point of dumping my shares would be a buyout of Sears or anyone else.

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