New year spells tough times for e-tailers

Despite booming holiday sales, Web retailers can't seem to get a break from Wall Street.

3 min read
Despite booming holiday sales, Web retailers can't seem to get a break from Wall Street.

Amazon.com's stock fell nearly 13 percent today despite a better-than-expected retailing report for the fourth quarter. The Internet pioneer said its fourth quarter sales exceeded $650 million, topping the revenue it generated in all of last year.

Sears, a bricks-and-mortar retailer that is expanding onto the Web, saw its stock fall today as well--despite announcing only yesterday that fourth-quarter sales figures were better than expected.

In the coming days and weeks, all eyes will be on other retailers--not only the pure Web plays but also those companies that have added Internet sites, dubbed the "clicks and mortar" crowd. They also will be releasing their same-store sales figures for the fourth quarter, which includes the crucial holiday shopping season.

Many analysts remain bearish on the short-term outlook for the retailing market, even if the fourth-quarter results are as strong as Amazon's and Sears' reports.

"The problem is that this is the best holiday season in X number of years," Argus Research analyst Alan Mak said. "The question is: What's the encore? If this is the peak, where is there left to go? There's only one place to go, and that's down."

Fear that the Federal Reserve will raise interest rates this spring is the biggest single threat facing Web retailers, according to Keenan Vision analyst Vernon Keenan.

Analysts fear a rate hike will curtail consumer spending, which increased 4.9 percent during the third quarter of last year--the latest figures available. The Fed meets again in February and March.

The pressure felt by retail stocks in recent days--both among Internet and "clicks and mortar" players--comes on top of a general downturn in retail stocks last year.

Although giants such as Wal-Mart and Home Depot gained more than 60 percent in value last year, former high-fliers ended the year down. Starbucks fell 14 percent, Sears lost 29 percent of its value on the year, and Barnes & Noble ended the year down a whopping 52 percent.

E-tail stocks suffered a similar fate. Although Amazon ended the year on an up note, gaining some 42 percent on the year, other stocks such as eToys, Barnesandnoble.com and CDNow ended the year at or near their 52-week lows.

E-tail stocks have been hurt by Wall Street's increasing emphasis on profits, Argus' Mak said. Although the e-tailers have proven that they can generate huge sales, few of them have shown that they can turn those sales into a positive bottom line.

"The Street right now is beyond the entire notion of just caring about the sales," Mak said. "Now the question is can they generate a profit out of these sales, and that's still a question for a lot of these companies."

Mak said that Amazon's stock price might rebound some before the company releases its earnings. The company could get a boost from expectations that its book business did actually turn a profit in the fourth quarter as company chief executive Jeff Bezos has predicted.

But other e-tail stocks could remain mired in lowered valuations, as investors become more selective with their investments and look for companies with better hopes for profits, Mak said.

Traditional retailers could be hurt by the growing importance of e-commerce, the so-called cannibalization effect.

Although most land-based retailers saw their sales grow during the holiday season, the online retailers took the cream of the crop of sales. If the U.S. economy had not been growing so strongly, the increase in e-tail sales might have cut into offline sales.

"There would have been some dings on the bricks-and-mortar guys," Keenan said. "There would have been cannibalistic growth."

"Long-term investors should be in 'batten down the hatches' mode and wait for this thing to finish," he added.