JEFFERIES: Whole Foods could ‘put a dent’ in Amazon’s profits

pulse

August 30, 2017 5:21 PM

Amazon wasted no time cutting costs at Whole Foods stores, but the acquisition could effect the internet giant's near-term profitability, Jefferies says.

Amazon wasted no time making its presence known at Whole Foods stores across the country when it officially took over the grocer on Monday. Investors, though, didn't seem to think much of it: the stock is basically unchanged this week at around $961.

Even over the long-term, Amazon’s stock price hasn't really celebrated this deal. Shares opened 0.6% lower on Wednesday than they closed the day before the deal was announced in mid-June. Jefferies analysts — who maintain one of the highest price targets for Amazon stock — $1200 versus a Wall Street consensus of $1150, say the purchase will put a dent in Amazon's earnings. That is partly to reflect that Amazon immediately went about cutting prices of staples at Whole Foods.

"We are lowering our FY17/18 EPS estimates to $2.48/$7.38 (from $3.68/$10.30) but raising total rev to $177Bn/$228Bn (from $171Bn/$213Bn) as a result of layering the Whole Foods (WF) model onto our prior AMZN estimates," the bank said in a note Tuesday. "While WF is only growing single digits, and also puts a dent into near-term profitability, we think this acquisition presents a series of attractive call options for other parts of the AMZN business."

To be sure, Jefferies is still very bullish on Amazon, whose stock is up 25% over the past year. But analysts Brent Thill, Brian Fitzgerald, and Michael Turrin warn that “macroeconomic headwinds could slow top-line growth and margin expansion.” It all comes down to what color management can give on the earnings call next month.