e-Commerce Booms Amid Slow Retail Sales

For the second consecutive month this year, U.S. retail sales fell 0.5% in June over May to $360 billion. Retail sales are up 4.9% compared to the previous year and grew 6.5% in the first six months of the year compared to the previous year’s period. But despite a declining retail sector, online retailers are experiencing growth. Online retail sales are expected to grow 10% annually over 2009–2014 to reach $249 billion. Key players Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) are already witnessing strong revenue growth.

Amazon’s Q2 revenues of $6.57 billion grew 41% over the year and exceeded the market’s expected $6.5 billion. However, EPS of $0.45 was significantly short of the market’s targeted EPS of $0.54 despite increasing 45% over the year.

Amazon isn’t worried about the slowing retail sales and is instead looking to invest heavily in expansion of its operations. The company is working to add thirteen fulfillment centers in the year and has already hired 2,200 people during the quarter.

Amazon is also focusing on Kindle sales; the device continues to face stiff competition from Apple’s iPad and other e-readers, primarily Barnes & Noble’s Nook. Within the first quarter of the iPad launch, Apple sold 3.3 million units, compared with the market estimates of nearly 3 million Kindles sold in total. Further, there are now price wars underway in the e-reader market. After Barnes & Noble lowered the Nook’s price to under $200, Amazon slashed Kindle’s price by $70 to $189, $10 less than Nook’s retail price. Amazon also recently released a new Kindle version but kept its WiFi and 3G model at the same $189 price tag and is offering the WiFi-only version for $139.

It is not just hardware where competition is growing; the digital bookstore market is becoming crowded as well. With Google Editions expected soon and Apple’s iBookstore gaining ground, Amazon is working to expand its digital book collection. The company recently tied up with Wylie Agency for e-editions of 20th-century novels. As the e-reader price war continues, analysts expect devices to begin selling for less than $100. In the long run, the Kindle is likely to become free, with Amazon making its money on e-book sales.

Amazon’s U.S. Kindle Store has over 630,000 books, including 109 of the 111 New York Times bestsellers. Additionally, the company offers over 1.8 million free, out-of-copyright, pre-1923 books on Kindle. Amazon sold more than three times as many Kindle books in the first half of 2010 than in the same period the previous year and is now selling more Kindle books than hardcover books. Amazon expects e-book sales to “surpass paperback sales sometime in the next nine to 12 months.” Amazon’s e-books can also be read on other devices such as iPads through the company’s free application, thus ensuring it retained customers who might otherwise have moved to the iBookstore. As of now, Amazon seems to be secure in its market dominance.

To me, what is most encouraging, and I have said this repeatedly, is that e-books will rationalize the business model of the book business such that authors gain more control of the process and a better royalty structure. Having worked closely with Amazon, I am certain that as Amazon and Apple continue to develop their e-book businesses, they will make it increasingly easy for authors to publish directly onto their platforms and market directly to their readers. Traditional publishers simply cannot compete with this model without making some changes.

The company projects revenues of $6.9 billion–$7.6 billion with operating income of $210 million–$310 million. The market was expecting revenues of $7.16 billion with operating income of $361 million.

The stock is trading at $117.89 with a market capitalization of $53 billion. It touched a record high of $151.09 earlier last quarter.

eBay, meanwhile, managed to exceed earning expectations for the quarter. For Q2, revenues grew 6% to $2.2 billion compared with the market’s projected revenues of $2.16 billion. EPS of $0.40 grew 8% over the year and exceeded the market’s targeted $0.38.

Marketplace revenues of $1.4 billion grew 11% over the year driven by growth in the company’s European business. The gross merchandise volume (GMV) rose 13% to $12.5 billion. eBay ended the quarter with 91.8 million active users, compared with 88.4 million a year ago.

eBay continued to ride high on the performance of PayPal, which grew 43% in the volume of payments in its merchant services business. PayPal revenues grew 22% to $817 million. During the quarter, PayPal added an average of 1 million new accounts per month, ending with 87 million active accounts. eBay is expanding PayPal in Asia and recently entered the Japanese online payments market with SoftBank payment services. PayPal is now on the top five gateways in Japan, a market estimated to be worth over $25 billion in addressable spending.

As part of its mobile strategy, PayPal announced mobile deals in Singapore and Malaysia to launch the MobileWallet in Asia, and it introduced Mobile Express Checkout for PayPal users in the United States, enabling consumers to make transactions on their mobile phones. It is not just PayPal’s applications that are gaining ground – eBay also launched a selling application in the UK that has become a top ten application in the country. It recently acquired the RedLaser iPhone app, a bar code scanning application for iPhones, which helps users make shopping comparisons. eBay is aiming to reach a GMV of $1.5 billion using its mobile applications.

The company expects Q3 revenues of $2.13 billion–$2.18 billion with EPS of $0.35–$0.37, compared with analysts’ forecasts of $0.39.

The stock is trading at $20.91 with a market capitalization of $27 billion. It touched a 52-week low of $19.06 earlier this month.