The U.S. economy may be struggling to shake off the recession as it enters the 2009 holiday season, but online retailers such as Amazon ( AMZN) look set to shine through the gloom. Despite some positive noises in the broader economy, retail is still licking its wounds after a tough 12 months. The National Retail Federation, for example, has forecast a 1% year-over-year decline in sales this holiday season, as ongoing uncertainty about job security and housing takes its toll on consumer confidence. In contrast, a report released this week by analyst firm Forrester predicts a healthy shopping season for online retailers. Forrester forecasts online retail sales of $44.7 billion between November and December, an 8% increase on the same period last year. Not bad considering the events of the last year or so. "Despite the lingering effects of the recession, the online space remains the retail industry's growth engine," said Forrester analyst Sucharita Mulpuru, in the report. This makes perfect sense, particularly at a time when consumers are still nervous about spending cash. Amazon, which recently enjoyed a massive third-quarter sales and profit hike, has been one of the stars of this earnings season. The Seattle-based retailer has become an Aladdin's cave for the Web generation. After making its name shipping books around the globe, Amazon has successfully branched out into multiple product lines. The Kindle e-book, for example, was Amazon's bestselling item by both unit sales and dollars during the quarter, which bodes well for the holiday season.
Unsurprisingly, Amazon has been feeling the analyst love, and the company's stock has more than doubled since the start of this year. "Chasing run-away stocks is not my idea of fun!, but this one may be the exception," wrote Jefferies analyst Youssef Squali, in a recent note, raising his Amazon price target from $88 to $120. Named after the world's longest river, speed and scale are central tenets of the Amazon business model, and key weapons in its battle with the likes of Wal-Mart ( WMT). Amazon, which was recently described by Jim Cramer as the "lowest-cost producer on the Web", has earned a reputation for tight inventory control, swift order fulfillment and a rapidly growing store of products. Earlier this week, for example, Amazon completed its acquisition of Internet shoe retailer Zappos.com. Other technology companies are also enjoying the benefits of the online retail boom, particularly as the main players branch out into new areas. Systems management specialist BMC ( BMC), for example, supports Amazon's EC2 offering for cloud computing. The software maker, which recently saw its second-quarter profit jump 35%, is reaping the benefits of increasingly sophisticated Web-based services, according to CEO Bob Beauchamp. "It's one of the hottest topics that we see at BMC today," he said, in a recent interview with TheStreet. In Forrester's recent report, Mulpuru also argues that larger online retailers such as Amazon and eBay ( EBAY) are less vulnerable to a spending downturn than their smaller Internet rivals. "Smaller retailers are in a more difficult position than their larger counterparts because they have less financial resources and marketing clout," she wrote.
Amazon rival eBay certainly fits the description of an Internet retail giant. The world's largest online marketplace has more than 89 million active users, and recently enjoyed its first year-over-year revenue gain in 12 months. Whether eBay can emulate Amazon's success against brick-and-mortar companies, however, remains to be seen. Despite its sales hike, eBay's net income tumbled 29% in its third-quarter results, although there were positive rumblings in its core marketplace business. After massively declining revenue in the last two quarters, marketplace sales dipped just 1% year-over-year, prompting speculation that eBay is getting its house back in order. The company has been on a mission to breathe new life into its main Web site, and appears to be gaining traction. "Management's turnaround strategy is working," wrote Jefferies analyst Youssef Squali, in a recent note, explaining that the company's gross merchandise volume grew 2% compared to the prior year's quarter. In a recent poll, TheStreet reader identified brick-and-mortar-companies as potentially the biggest losers in a holiday-season price war. Sears ( SHLD), for example, took the lion's share of the votes, with more than 45% of respondents saying that the company is most likely to be hurt by a price war, closely followed by Macy's ( M). Amazon, the only purely online player listed, received the lowest number of votes, with just over 3% of readers identifying the company as vulnerable to aggressive pricing. Amazon and eBay also face the challenge of Sears.com, Macys.com and Walmart.com, which all saw their Web traffic increase during the 2008 holiday season, according to research firm ComScore.
Forrester analyst Mulpuru predicts that online retailers will focus heavily on the bottom line this holiday season, improving their margins as opposed to chasing sales. "Tighter offline inventories may benefit the online channel as consumers go to the Web looking for products-and prices- they can't find in stores this holiday," she wrote. "Online retailers will be ready for them with a special focus this year on engagement and service." -- Reported by James Rogers in New York