Is Amazon On The Hunt? Analyzing Rumored Macy's, J.C. Penney Acquisitions

Sitting on approximately $27 billion in cash and enjoying robust economic growth during the COVID-19 pandemic — with second-quarter sales expected to grow more than 27% — Amazon.com Inc AMZN is rumored to be on the acquisition hunt. One often mentioned target is iconic retailer Macy's Inc M. Another is J.C. Penney JCPNQ.

Both have faced their share of struggles in recent years as more consumers shift to online buying, and with the pandemic shutting large portions of the economy, plenty of retailers are forecasting dire financial years, giving a company like Amazon and its cash-powered room to maneuver.

What would Amazon want with a struggling retailer? Jeff Bezos' goliath likely sees what others, including Macy's, are seeing: opportunity.

Macy's Chief Executive Officer Jeff Gennette told J.P. Morgan that he sees about $10 billion of potential opportunity "up for grabs right now." Macy's, too, has explored possible acquisitions in the past year, Gennette said.

Time to buy

"You see certain brands today that are either going to Chapter 13 or Chapter 11," Gennette said during the May 21 fireside chat. "We'll look at that very carefully depending on the brand … and with the location."

The $10 billion represents market share, and due to a flood of retail bankruptcies already this year that is expected to worsen if shoppers don't quickly return to stores, there is plenty of opportunity. Already in 2020, Neiman Marcus, Stage Stores, J.C. Penney and Pier 1 Imports have entered bankruptcy. Pier 1 Imports is liquidating its entire business and J.C. Penney is closing 30% of its stores.

Macy's itself is slated to close some 125 stores over the next three years, making it a perfect distressed buy for Amazon. Seeking Alpha said Macy's market cap is $2.15 billion and it holds about $5.7 billion in debt. Its stock is down about 70% in the past year.

In May, Women's Wear Daily reported that Amazon was discussing an acquisition of J.C. Penney, citing sources within the troubled retailer. The sources indicated Amazon was interested mostly in J.C. Penney's apparel business, but also in some of the real estate the company owns.

Macy's also owns most of the real estate where its stores are located, so acquiring either retailer could give Amazon a large swath of real estate, in addition to clothing and household product lines. Macy's has a strong online business as well, doing about $5 billion a year through e-commerce.

Location, location, location

According to the Women's Wear Daily report, Amazon could be looking at 30 J.C. Penney locations with any potential acquisition. S&P Global said an acquisition with real estate attached could be in line with current thinking for Amazon.

"Amazon has lately displayed a voracious appetite for all kinds of real estate. The company reportedly looked at buying department store Kohl's and AMC Entertainment Holdings Inc., the movie theater chain, and it has new grocery and convenience store concepts in the works. Amazon also is looking to expand and streamline the crucial last mile of delivery," the report said, adding that real estate could allow it to quickly add distribution centers to reach more rural areas where Amazon is not as strong or to allow consumers to pick up in store.

Just Tuesday, Amazon signed a deal for a 1.5 million-square-foot warehouse in New York City with an agreement for an additional 620,000 square feet at a property in Brooklyn, New York. Both locations will be new developments but suggest Amazon's appetite to continue growing its warehouse network is still strong.

Barron's, however, dismisses the J.C. Penney rumors and thinks Macy's is the better play for Amazon.

Apparel appeal

"Amazon has always found it challenging to get large branded apparel companies to sell more aggressively on its site. For example, neither Ralph Lauren Corp RL, featured prominently at Macy's stores, or Canada Goose Holdings Inc GOOS, sold at Bloomingdale's (which Macy's owns) sell much on Amazon. Buying Macy's may provide a way in, though it's unclear how responsive those brands would be," Barron's wrote.

Analysts are unable to agree on whether Amazon wants to get into brick-and-mortar retail. It did acquire Whole Foods in 2017 for $13.7 billion, adding approximately 450 physical storefronts.

The acquisition of any traditional retail outlet would come with logistical challenges. On the plus side, both Macy's and J.C. Penney's storefronts are located closer to the end Amazon customer than most current Amazon distribution centers.

The real estate could be a strategic play for Amazon in its battle with Walmart for online dominance. Entrepreneur.com said Walmart Inc WMT is able to deliver grocery items 20% cheaper than Amazon can because of its physical store locations. Walmart also allows in-store pickup for both grocery and nongrocery online orders, something Amazon can only offer at its Whole Foods and Amazon Go convenience locations.

According to a November 2019 First Insight poll, 55% of people said they prefer to shop at Walmart versus Amazon, an increase of 8% from a similar 2018 poll. Those favoring Amazon dropped from 53% to 45%.

Amazon still dominates the e-commerce space, but estimates suggest its market share fell from 49% in 2018 to 44% in 2019, Bank of America said. While Walmart holds just 7%, it is growing and much of that growth is coming at Amazon's expense. If Walmart is able to leverage its physical locations to hold down shipping costs, and therefore costs of goods, its recent success cutting into Amazon's market share may have legs, and Amazon's response may be a large retail purchase.

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