Morgan Stanley: Why Retailers Should Continue To Worry About 'The Amazon Effect'

Amazon.com, Inc. AMZN — with its unique business model and financial might — is invariably blamed for the demise of several retailers. With the third-quarter retail reporting season in the rearview mirror, one Morgan Stanley analyst delved into how the e-commerce giant continues to pose a threat to the surviving members of the retail sector.

The Analyst

Morgan Stanley analyst Simeon Gutman made the following price target changes for retailers in the firm's coverage universe:

Target Corporation TGT: maintain Underweight/price target reduced from $70 to $60.
Best Buy Co Inc BBY: maintain Equal-weight/price target reduced from $80 to $75.
BJs Wholesale Club Holdings Inc BJ: maintain Equal-weight/price target reduced from $30 to $28.
Williams-Sonoma, Inc. WSM: Equal-weight/price target reduced from $60 to $55.
Lowe's Companies, Inc. LOW: maitain Overweight and $110 price target.

The Thesis

Amazon's impact on retail margins has yet to level off and could take a few more years, Gutman said in a Wednesday note. (See the analyst's track record here.)

The dominant theme across Q3 retail earnings reports was "profitless" growth, with EBIT dollars declining for four of the above five retailers, he said.

Although retailers have made some headway in e-commerce, most hardline and broadline retailers are experiencing a highly dilutive margin structure, Gutman said.

Notwithstanding retailers reporting their best comps in years in Q2, the flow-through — or margin performance — was very poor, the analyst said.

The Q3 flow-through was no better, and sales have decelerated modestly, even as the "intensely promotional Q4" gets underway, Gutman said.

Morgan Stanley expects the cost of doing business to rise further in 2019 for retailers.