Battleground: Analysts Disagree On Whole Foods’ Financial Impact On Amazon

Two research firms disagreed on the financial impact of Amazon’s (AMZN) acquisition of Whole Foods (WFM). Jefferies responded to the deal by lowering its earnings per share estimates for Amazon, while RBC Capital increased its 2017 and 2018 EPS estimates for the tech giant.

JEFFERIES CUTS EARNINGS OUTLOOK: Analyst Brett Thill slashed his fiscal 2017 and fiscal 2018 EPS estimates for Amazon to $2.48 and $7.38, respectively, from $3.68 and $10.30. Thill lowered previous revenue estimates for Whole Foods by 10%, as he assumed that Amazon would implement “aggressive” price reductions on key staple items, including bananas, eggs, ground beef, and apples. However, he cut the cost estimates for Whole Foods by $200M to reflect “public company cost synergies.” As a result of these changes, the analyst reduced his estimates for Amazon’s fiscal 2017 and fiscal 2018 operating margins to 1.4% and 2.9% from 1.9% and 3.8%. However, the impact on Amazon’s total earnings before interest, taxes, depreciation, and amortization was “minimal,” Thill wrote. As a result of the relative stability of his EBITDA outlook, Thill kept a $1,250 price target on the shares. He also maintained a Buy rating on Amazon.

RBC ON OTHER SIDE: RBC analyst Mark Mahaney assumed that there would not be any synergies from the deal. However, he raised his 2018 revenue estimate for the tech giant by 8% to $224B and increased his 2018 EPS estimate for the company by 4% to $9.79. Over the longer term, Amazon will probably cut the prices of many produce items at Whole Foods, since the grocer typically charges premiums of 20%-30% for such items, and its overall food margins are about ten percentage points higher than those of Kroger (KR) and Wal-Mart (WMT), the analyst stated. Whole Foods’ overall margins could drop to as low as 24% from the current level of 33%, he wrote. However, the grocery chain’s same-store sales could rebound to its 2013 levels of 6%, he believes, and Amazon could obtain operating efficiencies of 5%, according to Mahaney. Based on his most aggressive price cut scenario for 2019, the analyst estimated that Whole Foods would increase Amazon’s revenue by 7% and lower its operating profit by 2%. He kept a $1,100 price target and an Outperform rating on Amazon shares.