As the economy continues to suffer from lower consumer confidence and weaker consumer spending, many believe that the retail sector has taken a beating from these weaknesses. One segment related to retail is eCommerce, an online version of retail that can be seen with companies such as Amazon.com Inc. [AMZN: 78.74, 0.00 (0.00%)], eBay Inc. [EBAY: 14.29, 0.00 (0.00%)], and Barnes and Noble, Inc. [BKS: 23.51, 0.00 (0.00%)]. What many economists and consumers have overlooked is the continued out performance of this segment, especially by the segment leader, Amazon. As of April 13, 2009, Amazon has been up 45.22% year-to-date. Some may say that Amazon is overpriced, but with the company being best of the breed, eCommerce flourishing, and Amazon’s growth opportunities through its product innovations, I will prove why Amazon will continue to strive through 2009.

Amazon operates as an online retailer and generates revenue through its domestic and international websites. Its geographic revenue is broken down into 53% domestic and 47% international, while its business segments and units are broken down into three categories: Media (61%), Electronics (36%), and Other (3%). Amazon’s corporate strategy is, “not to discount a small number of products for a limited period of time, but to offer low prices everyday and apply them broadly across our entire product range.” Now to the reasons why Amazon.com will continue to outperform in this sluggish market. The first reason is its best of breed qualities. There are three reasons why Amazon is best of breed: it is the leader of its competitors, it has a strong balance sheet, and it has phenomenal international sales. Amazon is a $30 billion company, twice the size of its closest competitor eBay, while it has excellent compound annual growth rates (CAGRs) in revenue, EBIT, and EBITDA. Amazon also has a very strong balance sheet with $3.3 billion of cash available and $1.36 billion of free cash flow available, and as we all know, cash is absolute king in these markets. Amazon also has relatively low debt with only $687 million on its balance sheet and a debt to equity ratio of 0.2x. Amazon also has phenomenal international sales, up 33% in 2008 during the peak of the economic downfall. International sales grew at 19% during the fourth quarter of 2008 and are expected to grow through 2009. This leads me to my second driver as to why eCommerce has flourished recently.

There has been a recent shift from traditional retail to eCommerce. In 2008, domestic eCommerce was a $133.7 billion market, having grown at a compound annual growth rate of 17% since 2004, while traditional retail only grew at 4%. From 2005 through 2008, total retail sales grew 4.18%, while eCommerce grew 62.86%.  During the same period, eCommerce, as a percent of total retail sales, grew from 2.2% to 3.4%. Additionally, there were 1.5 billion internet users in 2008, which is at a penetration rate of only 23.6%. As more countries are exposed to internet (especially China), this figure is likely to increase, which causes increased traffic at Amazon’s sites. Speaking of increased traffic, Amazon has the highest amount of market share in the eCommerce business, holding 7.5% of the domestic eCommerce business, which is up from 5% in 2006. This brings me to my third point about Amazon’s growth opportunities through it’s product innovations.

One of the products that Amazon has introduced to the economy is the Kindle and Kindle 2, which are hand-held digital reading devices. Sales are outpacing management’s expectations, and although it might look like the Kindle 2 will cannibalize print book sales, they are planning to offer innovative product offerings to offset that possibility. Amazon makes money from these devices by offering subscriptions of digital newspapers and is even tinkering with the idea of selling advertising space on the Kindle. The Kindle 2 is estimated to make up 4.4% of Amazon’s total revenues by 2010. Another product that Amazon offers is Amazon Prime, which offers customers unlimited expedited shipping with no minimum purchase amount for a low annual fee, which helps companies and families too. Finally, there is Unbox, also known as Video On Demand, which allows customers to watch videos using Flash and does not require any additional applications.

Amazon.com Inc. will continue to strive through 2009, as it has best of breed qualities, operate in a strong eCommerce market, and will continue to see growth opportunities through its product innovation. Amazon reports first quarter 2009 earnings on April 23 after the bell with an expected EPS of $0.30 a share. Keep an eye out for those earnings, as Amazon is expected to address full year guidance and will likely surprise the markets.

- Brad Lightner

Disclosure: None.

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