Amazon's Low Margin Squeeze
NEW YORK (TheStreet) -- Retail investors get ready -- Amazon.com(AMZN) has got it right when it comes to low gross margins.
Despite the bearish belief that Amazon's gross margins are a drag on growth, they're actually a competitive advantage, Bank of America analyst Justin Post said in a note to clients on Thursday. He rates Amazon shares "buy" with a $270 price target.
Amazon's gross margin is 6.6% lower than the average gross margin of select offline and multi-channel retailers, including Walmart(WMT) , Target(TGT) , Best Buy(BBY) , Costco(COST) , Dicks Sporting Goods(DKS) , Foot Locker(FL) , Office Depot(ODP) , PetSmart(PETS) , RadioShack(RSH) , Staples(SPLS) and Walgreens(WAG) , according to Post.
The Bank of America analyst expects Amazon's gross margins to reach 13% in 2012. Walmart's gross margin have hovered around 25% since 2009, while Best Buy's have fluctuated between 24 and 25% and Target's around 30%.
"Amazon's strategy is right for the Internet as low prices and positive customer experiences should win out in an age of low switching costs. Amazon is a transformational company, and we think Amazon remains well positioned to benefit from the long-term secular growth of eCommerce," Post wrote. He believes Amazon will continue to gain market share by expanding categories and maintaining competitive pricing.
Third Party, Amazon Web Services and advertising will generate an estimated 1.45% gross margin benefit to subsidize major drivers of growth, such as hardware sales, video content and shipping programs.
Amazon's shares have gained over 28% year-to-date. Amazon shares rose 0.72% on Friday, trading at $222.16.
--Written by Nathalie Pierrepont in New York.
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