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If Amazon Prime Day 'doesn’t blow the doors off of last year, its a failure': Analyst

Charlie O’Shea, Moody’s Vice President & Senior Credit Officer joins Yahoo Finance’s Akiko Fujita to break down the latest on Amazon Prime Day, as the company’s annual shopping event rolls on.

Video Transcript

AKIKO FUJITA: Let’s bring in Charlie O’Shea. He is the vice president and senior credit officer at Moody’s. And Charlie, I think we do have you on. Let me just get your thoughts in terms of expectations going into this two-day event.

CHARLIE O’SHEA: If this doesn’t blow the doors off of last year, it’s a failure. With all the money Amazon has been spending on shipping and fulfillment, et cetera, we expect or estimate that they could go over $20 billion in shipping spend for Q4 this year when you combine the Prime Day phenomenon with holiday. So they’re spending a lot of money at this. And the other consideration is that– excuse me?

AKIKO FUJITA: No, I mean, I was going to say, this is the litmus test for just how sustainable Amazon’s growth will be going forward. I mean, you say it’s going to be considered a failure if they don’t improve on last year. I mean, what does a successful Prime event look like for you?

CHARLIE O’SHEA: I think it would be sales growth well over 30% year over year. And that’s hard to measure because it’s not like Amazon reports a two-day sales period. The other factor would be, what’s the impact on Prime membership? How many new members do they sign up? Is there any attrition, which I highly doubt in the fourth quarter of any year for Amazon. This is usually when they sign up the most members.

And then, you know, how well they’re able to leverage shipping and how well they’re able to handle the competition from the brick and mortar guys, who are all rolling out their– similar promotions, similar time frame, and are using their stores as a weapon as they have been for the last several years. But more importantly, over the last several months, when you’re seeing a surge in buy online, pick up, curbside, ship from store, et cetera, et cetera.

So this is as competitive a Prime Day environment I think as Amazon’s ever seen. And execution is going to be critical. They have to be able to deliver to the consumer within the time constraints that they’re offering. They can’t say you’ll get it in two days, and it shows up in four. That’s going to tick off a lot of consumers. That’s not what you’re aiming for. You’re aiming to, if anything, under promise and over deliver, rather than the reverse of that.

AKIKO FUJITA: And so to your point, Charlie, that’s going to put more pressure on the shipping side of things for Amazon. And you’ve made it pretty clear that with so much demand, there is increasing concern around Amazon’s ability to continue to keep up.

And let’s talk about the spending involved here, $13 billion in spending and shipping costs in the second quarter. That’s up $5.6 billion from the same period last year. And you’re estimating Q4 shipping expenses close to $20 billion because of the Prime Day event, but also holiday shopping. How big of a concern does that raise for you in terms of where Amazon’s debt levels go as a result?

CHARLIE O’SHEA: I’m not really concerned at this point. Amazon in Q2, we called it the Q2 surprise. Amazon blew its guidance away, built up a lot of extra capacity for increased debt. We didn’t expect the performance that we saw in Q2. So there’s some cushion there.

And from a ratings perspective, Amazon is very well positioned in its current rating. If anything, in a debt explosion or a meaningful increase in debt would just slow down the path to an upgrade. We have a positive outlook on the rating right now.

So the question for Amazon would be, OK, are we comfortable where we are now from a credit perspective? OK, then we’ve got kind of a war chest that we can go out and spend. I think we estimate their debt capacity at somewhere between $35 and $40 billion at the existing rating.

Or do we want to get that upgrade, and do we slow the spend? That’s a question that Amazon itself will have to answer. But there is a lot of room right now where Amazon is currently positioned.

AKIKO FUJITA: And Charlie, you point to the challenging landscape that Amazon has tried to– has had to navigate during the course of this pandemic. Obviously, the strong demand in e-commerce, the increasing pressures on shipping, also pressures coming from employees who are increasingly vocal about their concerns in their distribution centers.

You’ve also got more competition from the likes of Walmart. I’m just curious if you think all of this puts Amazon in a stronger position moving forward. Or do you think competitors are maybe starting to see some of the cracks in the system and trying to take advantage of them?

CHARLIE O’SHEA: I think the pandemic’s exposed a lot of cracks in retail, to be frank. But I think in Amazon’s case, it’s illuminating the point that there’s only so far you can go without a brick and mortar store network. And Amazon has gone an awful lot farther, I think, than anybody thought they could.

In this particular environment, you’ve got Walmart with 5,400 physical locations, for instance. Those are pickup points. Those are potential ship points. Amazon, in order to replicate that, has to keep throwing money at more vans, more trucks, more airplanes, more fulfillment centers, more flex warehouses, like the one down the street from me here in Pennsylvania.

And that’s expensive, and it’s also different. What we saw last year, when Amazon announced the next day delivery for Prime, they acknowledged that they underestimated the costs of getting inventory closer to the consumer. Well, that’s something that brick and mortar guys do every day as a matter of course. It’s called stocking a store.

So Amazon is facing increased competition. However, what’s happened during the pandemic is, as people become more accustomed to buying online, yes, it’s benefited Walmart and everybody else on the brick and mortar side, but it also casts a bright light on Amazon and how really good they are.

I mean, Amazon is the absolute platinum standard– forget about gold– for online retail. No one will catch Amazon individually. Walmart, everybody else is playing for second place. That’s not a bad place to be.

I saw a stat this morning that a lot of people are testing Amazon’s prices during this Prime Day promotion and going to a second site. You want to be the second site. And if you’re the second site, you’ve got to be really good. You don’t have to be Amazon. But you have to be in the ball game.

And I think that’s the competitive pressure that Amazon faces right now, is, they don’t have the, quote unquote, you know, the power that they had in the past, where they were really the only online game in town. Now there’s a lot of other competitors out there that have other things they’re able to leverage, like stores.

AKIKO FUJITA: Yeah, it’s interesting. You mentioned the comparison shopping. I found myself going back and forth between sites as well, and certainly a lot of competition out there, especially given all the focus on this Prime Day event. Charlie O’Shea, the vice president at Moody’s and senior credit officer there, it’s great to talk to you today.

CHARLIE O’SHEA: Thanks, Akiko. Good to see you again.

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