The debate over the taxation of Internet transactions and its potential effect on sales at leading e-commerce companies continues to heat up. The U.S Senate recently advanced legislation that would allow states to tax sales that are conducted over the Internet for out-of-state companies.
Many investors and online buyers are concerned that this move will curb the sharp growth in online retail sales. I think the potential ramifications might not be as severe. Let’s examine the recent developments in online retail and see why an added tax won’t hold down leading e-commerce companies.
E-commerce sales on the rise
The e-commerce (opens pdf) market continues to augment its market share of out of the total retail business: e-commerce sales grew from $194 billion in 2011 to more than $225 billion 2012 – an increase of 15.8% (year-over-year). In 2011, the growth was 15.2%. Moreover, in the last quarter of 2012, e-commerce sales grew by nearly 16% (y-o-y).
In comparison, total retail sales grew by only 4%. Thus, the market share of e-commerce out of total retail grew from 4.9% in the third quarter of 2012 to 6.2% in the fourth quarter of 2012. I think this trend will continue as more people shift their retail purchases to online stores.
Sales of total retail continue to rise this year: retail sales rose in the first quarter of 2013 by 2.7% (compared to the same quarter in 2012) – retail sales rose from $1 trillion in Q1 2012 to $1.1 trillion in Q1 2013.
Investors have demonstrated confidence in retail of late, as the ETF that follows retail – the SPDR S&P Retail (ETF) (NYSEMKT:XRT) – rose during 2013 (up to date) by more than 14.7%. Part of the reason for the rally is the growth of online shopping.
The share of Internet retail rose in this ETF from 7.6% as of June 2012 to 9.2% as of April 2013. The ETF is attempting to replicate as closely as possible, before expenses, the total return performance of the S&P Retail Select Industry index.
The index follows 97 retail companies, including names such as Rite Aid Corporation (NYSE:RAD), Netflix, Inc. (NASDAQ:NFLX) and SUPERVALU INC. (NYSE:SVU). Rite Aid has the highest share at 1.5% while Fred’s has the lowest at approximately 0.6%. Nonetheless, I think that if an investor wishes to invest in retail, he or she might as well consider a specific retailer that has higher growth (such as the two companies listed below), or at least pays dividend.
Let’s turn to analyze two leading e-commerce companies, their growth in sales, and the potential effect of the tax on online shopping will have on these companies’ revenue and earnings.
Amazon.com, Inc. (NASDAQ:AMZN)
If the new imposed taxes come into effect, they will (obviously) only affect a company’s sales in the U.S. As of the first quarter of 2013, Amazon.com, Inc. (NASDAQ:AMZN)’s North American sales account for 58% of its total sales. This percentage has risen moderately by roughly 1% to 2% every year. Nonetheless, this also means that the international segment accounts for 42%. So, if a tax is imposed, it will affect at best slightly more than half the company’s operations.
But will imposed taxes curb the company’s growth in sales? Since buyers already pay state taxes when they visit a store, the imposed tax on online retail might make certain products more expensive than they are in retail stores. Nonetheless, I still think many products will still remain cheaper.
Moreover, several products that Amazon.com, Inc. (NASDAQ:AMZN) sells, such as e-books, are growing not only because of the low price but also due to a change in preferences of many buyers. For example, according to a recent survey, nearly 21% of Americans have read an e-book. Those who shifted to e-books read 24 books a year, compared to 15 books for non-e-book readers.