May 6th, 2024: Amazon reports terrific Q1 2024 earnings, Nordstrom launches its marketplace, Paypal earnings reflects life in the slow lane, and UPS to power Shein returns in Forever 21 stores
Today’s episode of the Watson Weekly podcast is sponsored by Commercetools.
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It’s May 6, 2024 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Amazon Reports Terrific Q1 2024 Earnings
Nordstrom Launches Its Marketplace
Paypal Earnings Reflects Life in The Slow lane
UPS to Power Shein Returns in Forever 21 Stores
- and finally, The Investor Minute which contains 5 items this week from the world of venture capital, acquisitions, and IPOs.
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To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.
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BUT FIRST in our shopping cart full of news….
Amazon Reports Terrific Q1 2024 Earnings
Amazon Q1 2024 Earnings: Big Revenue Growth, Bigger Profit Growth
UPS/FedEx - did you catch the license plate of that big orange truck that hit you? Who else is exceeding top end of revenue projections? I hope Fred Smith is enjoying retirement.
Amazon knocked their quarter out of the park, particularly from an operating income/free cash flow point of view — thanks to the trinity of Fulfillment Regionalization, AWS, and 3P. No mention of exactly how much more juice is left to squeeze from fulfillment, but my number would be 30% if I had to pin a number on it (which Jassy did not). Already investing a few years, and a few more years to go— but the nature of optimization is the last few percentages are harder.
Amazon’s Q1 Results
* $143B revenue up 13% y/y. Some of best growth in this market. $15B in operating income.
* $48B in TTM FCF, up $53.2B y/y. This was the 🎤moment.
* NA segment sales increased 12% y/y to $86 B with operating income of $5B (up from $0.9B Q1 2023). Intl up 11% to $31.9B.
* 3P services revenue up 16% y/y to $34B, putting them on a ~$162B run-rate for this 2024.
* Advertising sales up 24% y/y, mostly sponsored products, up to $11.8B, putting them on a ~$58B run-rate for 2024.
* AWS up 17% y/y, now a $100B run-rate business. Margins increased 800bps from Q4.
* INTL established markets got to profitability. Emerging markets still developing.
IAmazon’s TTM Free Cash graph below dunks on its “never profitable” detractors. Take that.
* Regionalization helping increase units per box, improving density.
Q2 Predictions
* 7-11% growth (historically slower season, unfavorable FX)
Amazon’s Investment Cycles
Amazon over its history goes through investment and harvest cycles. Sometimes they sync up, sometimes they don’t. Capex was $48.4B last year, and will be higher this year: AI. Capex already $14B in Q1, that 2024 run-rate would put them 15+% over 2023 to $55B in capex. Let’s assume that without AI, their capex would be slightly down to something like 45 billion. This means, Amazon is spending almost a billion a month on AI by my back of the envelope math.
In next years, Amazon is in an optimization cycle with continued network improvements, further improving free cash flow.
AWS compute/storage is in a harvest cycle. AWS AI in a large investment cycle.
Amazon is going to keep investing in a few areas: nationwide grocery and AI. There is little risk that Amazon will underinvest in AI. Jassy described it like Cloud Computing or the Internet. Amazon noted that all new AI projects will be built on cloud, which could be a generational event for moving the 85% of worldwide compute from on-premise to cloud also — a double-opportunity for Amazon. (Sorry investors)
Don’t expect a large grocery rollout this year; even though Andy mentioned nationwide retail and perishables were critical. If it were me, think of this year as pilot phase of the new Tony Hoggett grocery regime. If early signs are good, the next phase of investment will also be small.
Also, did anyone watch Road House? Not a hit. The only thing I disagreed with on the call. I have seen Patrick Swayze, and Jake Gylenhaal, you are no Swayze.
[References:]
Our Second Story
Nordstrom Launches Its Marketplace
Calling itself the "Spotify of Fashion" doesn't help. Spotify has never turned a profit. Is this what consumers really want out of Nordstrom's? I think by "Spotify" they really mean "personalization" but I let this analogy lie there in your mind anyway.
Even if it it's a good idea - forgive me if I think the timing on this is curious. For a barely profitable department store, Nordstrom trying to go private, and launches a major new digital initiative at the same time?
Congrats to Mirakl and Nordstrom on the launch, but color me skeptical on the transformational impact.
Recall in 2011, Nordstrom entered the private sale marketplace (trying to catch up to Gilt) with the acquisition of Hautelook. At the time, this was the quote:
"... we are giving customers a fuller range of options for the way they shop today...". That eventually got shuttered/folded into Rack.
In 2024, on the launch of the new marketplace, this is the first value quote in the Nordstrom press release:
"... allows us to offer the full expression of our best brands and expands the depth of products and sizes we offer to our customers."
Here are a few key points:
* At this point, most vendors are required to dropship for retailers in between reorder cycles. But the assortment is not usually wide because of the cost/labor to setup a new SKU. Marketplace should streamline this.
And some thoughts:
* A marketplace should allow Nordstrom to streamline its brand onboarding process, and widen its assortment.
* Extended sizing on the same owned SKU is a relatively more advanced marketplace function. Will they be able to pull this off?
* Let's be clear -- offering full sizes online is not going to save Nordstrom. This has to be about new brands. (Can I ask please why Nordstrom doesn't do more collabs?)
* Nordstrom is investing more in digital, following a multi-year digital investment cycle from Macy's, and two years after the pandemic? Feels late.
* With the expansion of Rack offered this year (no doubt due to consumers trading down), it's clear that online may be the domain of full-price freshness it cannot afford to carry inventory on in stores.
This constant multi-year dance between off-price and full-price is confusing and damaging to the brand. Let's hope a well-curated marketplace does not cheapen it further -- and instead delivers on brand freshness and assortment.
[References:]
Our Third Story
PayPal Earnings Reflects Life in the Slow Lane
Does anyone else remember the old segment on Mad Television called “Lowered Expectations” which showed humorous segments about first dates that didn’t work out as planned?
Lowered expectations would be a good word for the future of Paypal.
By my math, at the end of 2026, Shopify’s gross payment volume will be about 15% of Paypal. Let me say this as nice as I can. Paypal does not want to let Shopify get traction, but it is fighting with 3 arms tied behind its back. At the bottom of the call, the Paypal CEO indicates that the company is fighting 15 years worth of legacy integrations with its merchants. Regardless of what you hear about Paypal FastLane, the company’s innovation will most certainly be in the slow lane.
Paypal’s revenue growth wasn’t terrible, it grew 9%, and operating income grew faster at 15% with total payment volume growing 14% year over year.
Overall, here are my expectations: slow progress and a slew of layoffs and restructuring, and slow uptake on new products due to legacy Paypal integrations.
Let me outline a few direct quotes from the call, with my commentary:
“Our new leadership team is operating well together, and we are really starting to get our arms around the business.”
Translation: we just had a fun offsite and we all did some trust-falls. Seriously “starting” to get your arms around the business - the new CEO Alex Chriss, started September 2023.
“We also see substantial need for continued retooling of the company”
Translation: Trust me, it’s worse than it even looks from the outside. If you have a job today, start polishing your resume.
"We have a plan… But it will take time to prudently drive a meaningful and sustainable transformation.
Translation: I’m sorry I can’t decode that BS. I prudently declined to comment on the psychobabble. The best I could come up with is Don’t hold your breath.
"Paypal Fastlane: We are just getting started and already creating a low double-digit lift in guest checkout conversion for participating merchants. we expect to make Fastlane generally available in the U.S. in the second half of the year.""
Translation: All of our competitors report 25%, checkout improvement but since we just started on this journey, we only got 10%. Even our competitors print analyst results, but we haven’t let third parties validate these results.
“Additionally, we are continuing to focus on making it even easier to pay with PayPal by removing friction from the checkout process. Our leadership team is continuing to go through our business from top to bottom, understanding where we can operate more efficiently and invest in the innovation that will offer the greatest impact for our customers and PayPal. This is a mindset shift.”
Translation: What the hell was your mindset before?
"We are also in the early stages of evaluating the overall dynamics and pipeline of our top 10,000 merchant accounts.
Translation: We have not yet received our 200 page Powerpoint from McKinsey.
"As we evaluate our programs, we see clear opportunities to price to value"
Translation: If you thought our product was bad before, wait until we raise prices!
"In the quarter, we onboarded BigCommerce and WooCommerce to our package tracking solution. In the 12 months since launch, we've had approximately 7 million active accounts use package tracking. This is a key pillar in our post-purchase strategy.
Translation: Does this sound like the Shop App to anyone else? How many accounts are BigCommerce and WooCommere winning from Shopify?
“interest income on customer balances was the highest contributor to transaction margin growth in the quarter.
Translation: We make it hard for merchants to remove their balances and we are basically a poorly run bank. Please buy more of our stock so it goes up.
Recall this was the same CEO who said in January we will shock the world. I wish I were making this up, but let me just say this. Muhammad Ali shook up the world. This earnings call instead put me to sleep and left me more worried for the future of Paypal.
Attention Shopify team, whatever resources you have on payments is not enough.
[References:]
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And Our Last Story
UPS to Power Shein Returns in Forever 21 Stores
Is this some kind of sick joke? What is it with this episode? If there were three names I would never expect to hear in the same sentence it is UPS, Shein, and Forever 21. Yet here we are.
Here is the news from the Retail Dive:
* On the back of launching a capability for online retailers to accept returns from different brands, Forever 21 is now partnering with Happy Returns to accept Shein customers to make returns without a box in over 300 Forever 21 stores.
If this is going to be the way of things, I predict Forever 21 may not be in business very long and perhaps that is Jamie Salter’s entire idea. Forever 21 holds all that expensive real estate on the books, and Shein retains all the profit. The solution can work with any returns portal and generate a QR code which can be used at dropoff by the consumer.
For Happy Returns this is a no-brainer, and for UPS this is likely a win as well to increase backhaul return density.
[References:]
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
AI-Designed Snack Maker Rivalz Raises $6.1M In Seed Funding
Healthy snack maker Rivalz has raised $6.1M in Seed Funding that will be used to expand production, sales, and marketing. How many healthy snack companies can there be?
Second
Product Information Platform Pimberly Raises £4M in Funding
Product information management (PIM) and digital asset management (DAM) SaaS solution Pimberly has raised £4M in venture funding, which will be used to expand and grow in the US and European markets.
Link: https://www.finsmes.com/2024/02/pimberly-raises-4m-in-funding.html
Third
Payments Processor Helcim Raises $20M Series B
Canadian payments processor Helcim has raised a $20M Series B funding round, which will be used to launch new solutions for the small-to-medium-sized businesses (SMB) sector. What makes Helcim and its investors bullish for the future?
Link: https://www.axios.com/pro/fintech-deals/2024/02/26/helcim-20-million-payments-fees
Fourth
Klarna in Talks With Banks for US IPO
Fintech platform and shopping solutions provider Klarna has spoken to investment banks for a potential $20B initial public offering in Q3 2024. Could Klarna be the largest IPO in 2024?
AND FINALLY …
Stripe Announced Tender Offer to Provide Employee Liquidity
Stripe partnered with investors to offer former and current employees a $65B tender offer, with some capital used to repurchase shares to offset dilution from its employee equity compensation program. Is this the new reality for late-stage private companies?
Link: https://stripe.com/newsroom/news/employee-liquidity-feb-2024
Today’s final word for the week of May 6, 2024 is: Lucky.
It hit me the other day, it is crazy how Shopify has been able to conquer the eCommerce platform market with a truly disinterested set of competitors including Adobe who doesn’t care much about eCommerce, Salesforce who forgot they bought Demandware and BigCommerce? Not so much either. With Shopify’s sights set on payments, they are poised to take share from Paypal where in a normal market this would be Paypal’s battle to lose, you are left wondering what weapons Paypal has to fight against Shopify’s eventual rise. Granted, Shopify is much smaller than Paypal in terms of payment volume but no one wants a a fast-growing competitor in their segment.
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Did you know that RMW Commerce has a brand new podcast? Check out The Watson Weekend for an unfiltered and lively eCommerce chat each week with me, Rick Watson, my co-host Jess Lesesky, and an array of interesting guests and topics. All focused on eCommerce. You can find the Watson Weekend by searching for it on iTunes, Spotify, or Youtube.
That’s all for this week! Till next time Watsonians.....
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Hi, I’m Rick Watson, CEO and Founder of RMW Commerce Consulting and host of the Watson Weekly podcast - your essential eCommerce Digest.
Our production partner for the series is CitizenRacecar. The show is produced by Jose Baez; Production Manager, Gabriela Montequin.
To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.
