I previously wrote an article using Dupont Analysis to compare Amazon.com, Inc. (AMZN) to both Wal-Mart Stores, Inc. (WMT) and Target Corporation (TGT). One of the key components in the Dupont Analysis is the asset turnover ratio, which compares revenues to average assets. AMZN and WMT have had similar ratios over the past couple quarters - about $0.60 for each dollar of assets in the last quarter. AMZN has a substantial uplift in holiday quarters, reaching almost $0.80 of revenue. TGT trails the two by a significant margin. At first glance, one should be surprised that AMZN, the internet store, requires essentially the same amount of assets to get to the same revenue as WMT with its ubiquitous physical presence. Furthermore, it returns less profit on those revenues than either WMT or TGT.
Not all assets are the same
However, this type of analysis, while at times insightful, requires additional scrutiny. Not all assets are the same. At the highest level, there are operating assets and financial assets. During the internet boom, people referred to bricks-and-mortar stores, essentially Plant, Property & Equipment. And all of those stores had to be stocked with inventory, creating additional asset requirements. All of these items have value in a liquidation with cash and short-term investments carrying essentially all of their value. Items like goodwill and intangibles might have very little value in a liquidation.
Furthermore, cash can be returned as dividend or capital to shareholders which would improve an asset turnover ratio with very limited impact on operations. It should be noted that for a retailer with a physical presence, some amount of cash is necessary for cash registers. So some cash is an operating asset, while most cash, especially in the case of AMZN, is a financial asset. The following chart compares the pre-holiday balance sheet, which probably reflects some increase in inventories relative to other quarters.
Click to enlarge.
Source: TCB Capital Advisors LLC.
This chart highlights several areas in which AMZN is different from WMT and TGT. AMZN, lacking bricks and mortar stores, has a substantially lower portion of its assets in Plant Property & Equipment (PP&E). AMZN's assets are much more tilted towards current assets, in particular cash and short term investments, than either TGT or WMT. In fact, over 60% of AMZN assets are current assets while TGT is at just under 40% and WMT is just under 30%. Other current assets should largely reflect net receiveables, where WMT shows its efficient operations.
Revisiting Asset Turnover
Based upon these new insights it is probably worthwhile to reconsider the asset turnover at AMZN in comparison to WMT and TGT. The first question is what is a more reasonable metric to use? A simple and direct approach would be to exclude cash and short term investments. Under this approach, the AMZN total for the pre-holiday quarter would rise to almost 0.9x assets from just .59x, while both WMT and TGT show very small increases. WMT increases from .57x to .59x and TGT increases from .35x to .36x.
Another metric that one could consider would be inventory which compares the company's Cost of Goods Sold (COGS) to the average inventory for the time period. This gives the number of times inventory is sold. The following table shows this comparison for WMT, TGT and AMZN.
| Ticker | Quarterly COGS ($B) | Average Inventory ($B) | Inventory Turnover |
| AMZN | 7.0 | 3.5 | 2.01x |
| WMT | 82.6 | 41.4 | 2.00x |
| TGT | 11.2 | 8.9 | 1.25x |
Average inventory is calculated as a straight average between the two quarter ends. In all three companies, inventory increased leading into the holiday shopping season. However, the ratio varied by company with AMZN increasing 17%, TGT increasing 25% and WMT increasing 14%. However, like any balance sheet information, this calculations is based on individual points in times, it is quite possible that the companies continued to increase their inventory leading up to Thanksgiving. One interesting note, is that AMZN did finish 2011 with a higher inventory than at the start of the last quarter. So once again, AMZN and WMT show better performance than TGT, but AMZN is clearly not substantially better than WMT.
Insights for AMZN investors and shorts
The first key point is that while high level analysis can create comparisons, it is important to dig deeper still. Good research on a stock takes time and effort. In my belief, Dupont analysis and in particular asset turnover probably presents a relatively unfair picture of AMZN as compared to other retailers. The power of its distribution model is clearly demonstrated by its substantially lower portion of assets in PP&E. However, AMZN is also active in several other spaces from cloud computing to digital media. It has substantial financial assets to pursue these new opportunities and can draw from a wealth of consumer information.
AMZN carries a low ROE. Even if the company paid a substantial portion of its cash as dividend to investors and reduce book equity, its ROE would still trail that of both TGT and WMT. Furthermore, I wouldn't expect that to occur since they are also effectively a technology company that is investing in future growth. However, this pits AMZN against a different set of companies that would include both Apple Inc. (AAPL) and Google Inc. (GOOG). While I've not done much research on either company, my intuition is that I would pick both over AMZN.
As I continue to look at AMZN as a short opportunity, my main thesis is that I believe they are overvalued for what they do. The second supporting aspect, that needs more work, is that as a retailer they are not, in financial terms, better than WMT or other retailers. The other half is that I would not bet on AMZN developing compelling new technologies relative to an AAPL or GOOG.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.
