On Line Commerce Metrics Key To Picking Stock Winners According To BWS Financial

• On 9:55 am EDT, Thursday October 22, 2009

67 WALL STREET, New York - October 22, 2009 - The Wall Street Transcript has just published its Online And Direct To Consumer Retailing Report offering a timely review of the sector to serious investors and industry executives. This 38 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Online Retailer Profit Margins Vs. Bricks-And-Mortar Retailers - Uptick In Internet Commerce - Secular Shift In Market Share To Internet Retailers - Post-Crunch Consumer Confidence - Growing Market Share For Online Travel Agents - Possible Consolidation Of HSN, Inc. - Amazon As The "Wal-Mart Of The Internet" - Online Marketing Vs. In-Store Marketing - Maximized Markdowns - Online Traffic Conversion Rates - Social Networking To Drive Brand Awareness - Online Sales Holiday Outlook - E-Commerce As A Path To International Expansion

Companies include: Abercrombie & Fitch (ANF); Amazon (AMZN); Ann Taylor (ANN); Apple (AAPL); Ask.com (IACI); Bebe (BEBE); Best Buy (BBY); Bidz.com BIDZ); Dell (DELL); Dick's Sporting Goods (DKS); Expedia (EXPE); GSI Commerce (GSIC); GameStop (GME); Gap (GPS); General Motors (GM); Google (GOOG); HSN (HSNI): Hot Topic (HOTT); Interactive Corp. (IAC); Liberty Media Interactive (LINTA); LivePerson (LPSN); MercadoLibre (MELI); Move Inc. (MOVE); Orbitz (OWW); Pacific Sunwear (PSUN); Quiksilver (ZQK); Ralph Lauren (RL); ShopNBC/ValueVision (VVTV); South Korea's Gmarket (EBGMy); Sport Supply Group (RBI); Staples (SPLS); Starbucks (SBUX); Target (TGT); Timberland (TBL); Urban Outfitters (URBN); VeriSign (VRSN); Wal-Mart (WMT); WebMD (WBMD); eBay (EBAY); hhgregg (HGG); priceline.com (PCLN).

In the following brief excerpt from just one of the in depth interviews in the 38 page report, an highly ranked equity analyst discusses the outlook for the sector and for investors.

Hamed Khorsand has been Chief Equities Analyst at BWS Financial, Inc., for the last nine years with a concentration on value-driven and growth stories. Mr. Khorsand has focused on the emergence of new technology that has not yet caught the eye of mainstream America, and he has developed a reputation for his attention to research quality in seeking the best stocks. Mr. Khorsand is a highly ranked analyst by StarMine.

TWST: If you're an investor who is new to online retail and you're looking at Amazon or a similar company, what are some of the industry-specific metrics you should evaluate before buying?

Mr. Khorsand: I'm always looking at the traffic statistics of the Web site and comparing that with the traffic statistics of other competing companies, the majors like a Wal-Mart. And again statistics of what Target.com (TGT) is doing that has helped since Target is still a partner of Amazon. It's those incremental data points that provide some glimpse as to if it's just a one-time hiccup at one of these Web sites or if there is actual overall demand - people are actually trying to shop around, see if there is pricing out there, see if you can also tell if there are actual increasing shopping habits during this specific period. So that would be the best way to gauge it, and also seeing how eBay is tracking from a number of auctions that are up, what the count is, you can count as to how many new auction items are always posted.

TWST: With so many more traditional retailers really building up the e-commerce parts of the business, is that something Amazon needs to be worried about?

Mr. Khorsand: I think it really comes down to when you're online, it's all about price and it's all about ease of use. I mean you're always a click away from going to the next person. So it's always about having the product that people want and having it at the best price because that's all that really matters when it comes to online shopping.

TWST: There is so much competition for consumers' attention and many online retailers have built up their sites to make them more interactive with things like streaming video. What is your view on the quality of Amazon's site attracting and engaging customers?

Mr. Khorsand: You can always make your site as attractive as possible for all of these gadgets and cell phones on those sites. But what it really will come down to is that it's not distracting, because if it's distractive - I'm a consumer, I'm looking for something specific, I don't want to be distracted from it, I might forget what I'm buying and the whole process is broken at that point. So you don't want to do that.

TWST: So you recently downgraded Amazon to sell?

Mr. Khorsand: Correct.

TWST: Would you talk about the reasoning behind that decision?

Mr. Khorsand: Sure. It's clearly based on the fundamentals. So Amazon's story that's been given a premium by the markets for operating margin, the fundamentals and operating - the magic number the market's always looking for is that 5% operating margin number that hasn't been gained since 2007. It's been over two years, and when Q2 numbers came out, operating margin was at 4.1%. And when you go into Q3, Amazon - this is what happens with Amazon. You have an increase in spending on technology, you have an increase in demand from consumers for back-to-school, but what that entails is that these consumers typically end up using an Amazon Prime account. Amazon Prime is free shipping. So Amazon ends up incurring higher shipping costs during this quarter. So your operating margin always usually goes down in Q3. So your 4.1% ends up being under 4% in Q3. Then we go into Q4, and in Q4 you have a story of the holiday shopping season, where it's basically more Amazon Prime spending. You also have promotions and cutting of prices to push inventory out the door, which again reduces your operating margins, and that combined, you're now looking at something that will be probably sequentially lower than Q3 operating margin levels. And to bring all this into perspective, again, as you have this eBay factor - eBay has been a non-event for the last two years, but they've become very aggressive over the summer time frame. They became very aggressive to get their merchants back. You saw that in the Amazon numbers. Amazon had a smaller amount of units shipped actually for third-party merchants. I think they went down to 29% from 31%, if my number is right. So that number suggests eBay is coming back. eBay has been very aggressive in asking the Amazon earnings numbers, they've been very aggressive trying to get their merchants back. That's going to have impacts in operating margins because those third-party merchants' revenues were higher gross margin business. So that becomes a factor. And I think how the market's still perceiving Amazon is it's a revenue/earnings play, and that's just not the case. They will put up revenues but you're not going to see operating margin. If this story that I just explained to you pans out, then this premium that Amazon has been trading at or receiving from Wall Street is going to deflate.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 38 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

For Information on subscribing to The Wall Street Transcript, please call 800/246-7673

Buzz up!