Amazon's rightsized and regionalized fulfillment strategy set to deliver more profits and more stock gains ahead

Published Thu, Mar 7 20247:16 AM EST

Amazon will continue to reap benefits from its post-Covid overhaul of its fulfillment network in 2024 and beyond. It's a key pillar in the Investing Club's belief that the stock has even more upside ahead. The advantages of rightsizing and regionalizing Amazon's national operations around warehousing, shipping, and managing returns are two-fold: cost savings and faster delivery times. Amazon's strategy to cut the pandemic bloat out of its e-commerce operations is "paying off and speeding up shipping times and reducing costs," said Jeff Marks , director of portfolio analysis for the CNBC Investing Club with Jim Cramer. "If Amazon can continue to drive these efficiency gains, the margin expansion should keep [shares]" adding to last year's strong gains. Since the first quarter of 2023, the e-commerce giant either closed, canceled, or delayed the construction of roughly 202 facilities, according to recent data from MWPVL International. The supply chain and logistics consultancy, which has been tracking Amazon for more than 15 years, attempted to put those savings into hard numbers. As a result of the real estate reshuffling, MWPVL estimates about $10.5 billion in capital expenditure savings and additional billions in operating expense savings. The data was reported by Roth MKM, which recently hosted a conference call with MWPVL CEO Marc Wulfraat. Some of the benefits are already showing up in Amazon's financials. Management said last month during the company's fourth-quarter earnings call that Amazon in 2023 reduced its cost-to-serve on a per-unit basis globally for the first time since 2018. Amazon thinks it can do it again this year. Management also said 2023 was the fastest year ever for delivery to Prime members. Not only is stocking items closer to their final destination lowering costs, but the faster delivery times are stoking demand, CEO Andy Jassy contended on Amazon's third-quarter earnings call. "When you deliver faster delivery to customers they actually start to consider you for a lot more items than they otherwise would," Jassy said. "Getting something same day or next day" changes consumer buying habits, he added. AMZN 1Y mountain AMZN stock performance. Amazon shares, which soared 81% in 2023, have climbed another 14.5% this year. After closing at $174 per share Tuesday, the stock only needs to advance another 7% or so to take out its July 2021 record close during the Covid-era bull market. Roth MKM analyst Rohit Kulkarni recapped MWPVL's call in a recent note to clients titled, in part: "Years of Efficiency in Progress" — a play on a similar phrase coined by Meta Platforms CEO Mark Zuckerberg in February 2023 as he signaled to Wall Street that the social-media giant was serious about cutting costs and boosting profits. Zuckerberg's commitment to lean operations not only improved the Club holding's 2023 operating margin to 35% from 25% a year earlier, but Meta shares nearly tripled last year. Meta has gained another 40% in 2024. The debate with Amazon has always been about how much more will management continue to invest in the business and at what point will it realize it is over-investing, Kulkarni said in a CNBC interview. Amazon appears to have figured it out. The company's distribution network grew significantly during Covid as it raced to keep up with surging online sales amid lockdowns and closures. Ultimately, however, Amazon ended up overextending itself by adding too much warehouse capacity, which led to exorbitant costs. The e-commerce giant was then forced to reassess operational needs and retool how orders are filled as consumer demand normalized in a post-pandemic environment. The stock price fell on hard times, too, losing nearly half its value in 2022's bear market. A key piece to Amazon's corrective action was breaking its massive national fulfillment network into eight regional centers, with goals of reducing delivery times for customers and the cost to get packages to doors. The strategy partially went into effect in January 2023, but the second quarter of last year marked the first full quarter that Amazon's entire U.S. operations were covered by regionalization, according to conference call transcripts. A year ago, Amazon had around 25% excess warehouse capacity in North America, according to MWPVL. Currently, that number has fallen to about 12%, the consultancy added. Kulkarni predicted Amazon will continue "to shave off excess capacity that they have built over the last five years and be very efficient with how the future build-out will look." That approach would be a "significant positive" for Amazon's retail margins and, by extension, a "big positive for investors," the analyst said. "Rationalization is not over yet," Kulkarni told CNBC Amazon's regionalization strategy also has led to savings for Fulfillment by Amazon, or FBA, its popular logistics program for sellers, according to MWPVL. The logistics consultancy estimated the global cost of an FBA unit was $4.50 in 2023, down 5.5% from $4.76 in 2022. When adjusting for inflation, Amazon's shipping cost per FBA unit fell by an estimated 10%, translating to a roughly $9 billion decline in shipping expenses, the firm said. Additional evidence that Amazon's regionalization strategy is working appeared in the company's stellar fourth-quarter retail results. North American retail margins improved for the seventh consecutive quarter since their recent lows in the first quarter of 2022 — coming in at 6.1% in the three months ended Dec. 31. Over those seven quarters, Amazon said it's seen 800 basis points of margin improvement, equal to eight percentage points. That implies the segment at its recent lows had negative margins — meaning it was costing more to run operations than revenue was coming in. Crucially, Amazon's margin expansion may not be exhausted yet – something we suspected but was nevertheless made clear by MWPVL. It gets to the heart of Kulkarni's suggestion that Amazon is looking at "years of efficiency," not just one year. As Amazon's regionalization progresses with a more disciplined approach toward expenses, higher retail operating margins should appear over time. That should lead to more profits and upside for the stock, according to Zev Fima , a portfolio analyst for the Club. (Jim Cramer's Charitable Trust is long AMZN, META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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An US giant Amazon employee passes by its logo on the opening day of the new distribution center in Augny, eastern France, on September 23, 2021. (Photo by SEBASTIEN BOZON / AFP) (Photo by SEBASTIEN BOZON/AFP via Getty Images)

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