Money Wall Street is bailing on its one-time retail darling Costco after Amazon’s deal for Whole Foods

17:27  19 june  2017
17:27  19 june  2017 Source:   CNBC

Amazon to buy Whole Foods for $13.7 billion

  Amazon to buy Whole Foods for $13.7 billion The online retailer is stepping into the physical retail world in a big, big way.The online retailer, which has spent the last few years toying around with experimental physical stores, said it has agreed to acquire Whole Foods Market for $13.7 billion, or $42 a share. The companies expect the deal to close in the second half of the year.

Wall Street is bailing on its one - time retail darling Costco after Amazon ’ s deal for Whole Foods . Deutsche Bank says Costco will face increasing competition from Amazon after its deal to buy Whole Foods Market for .7 billion.

Read more: Retail , Mergers and Acquisitions, Amazon .com (Nasdaq:Amzn), Costco Wholesale (Nasdaq:Cost), Wal-Mart Stores (NYSE:WMT). Cummins (CMI) to Lead Current and Future Technologies. Costco Downgraded After Amazon - Whole Foods Deal .

  Wall Street is bailing on its one-time retail darling Costco after Amazon’s deal for Whole Foods © Provided by CNBC Wall Street is increasingly worried over Amazon's (AMZN) threat to Costco (COST) after the e-commerce giant's $13.7 billion deal to buy Whole Foods Market (WFM).

Costco shares fell 7 percent Friday on the news.

And now one trading day after Goldman Sachs downgraded Costco, another bank is following suit.

Deutsche Bank lowered its rating for Costco to hold from buy Monday, saying the competitive advantage from its food business is at risk due to Amazon.

"The WFM acquisition represents a game changer with COST's competitive moat in grocery under greater threat while its digital platform lags peers, putting membership renewal at risk for decline," analyst Paul Trussell wrote in a note to clients Monday. "The pipeline of positive catalysts has played out and the competitive backdrop is intensifying with AMZN & WMT accelerating in-store and online efforts and innovation."

The analyst reduced his price target for the company to $172 from $187, representing just 3 percent upside from the Friday's close.

Amazon to buy upmarket grocer Whole Foods for $13.7 billion

  Amazon to buy upmarket grocer Whole Foods for $13.7 billion <p>Amazon.com Inc said on Friday it would buy U.S. organic supermarket chain Whole Foods Market Inc for $13.7 billion, including debt.</p>WFM

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The deal by Amazon , a proven retail disruptor, marked a major step by the internet retailer into the brick-and-mortar retail sector. Shares of Target , CVS Health and Costco fell between 4 percent and 7 percent. Wall Street dips after Fed rate hike; tech slumps again.

Quotes in the article

Costco Wholesale Corp

COST

What This Whole Foods Acquisition Means for Wal-Mart and the Rest of the Industry

  What This Whole Foods Acquisition Means for Wal-Mart and the Rest of the Industry What This Whole Foods Acquisition Means for Wal-Mart and the Rest of the Industry

Grocery giant Kroger said Thursday that its profits for the year would be lower than Wall Street expected, sending its stock plunging nearly 20%. Then Kroger’ s stock plummeted 13% further on Friday after the Amazon - Whole Foods detail was announced.

The deal rattled the retail sector. The S&P 500 consumer staples index dropped 1 .14 per cent, weighed down by Wal-Mart, Costco and Kroger. Amazon shares were up 3.4 per cent at US7.84, while Whole Foods surged 27.7 per cent. “ Amazon ’ s got its tentacles everywhere and that’s another place

163.96
-3.16
-1.89%
Amazon.com Inc

AMZN

999.94
+12.97
+1.31%
Whole Foods Market Inc

WFM

43.33
+0.63
+1.48%

After the downgrade, seven analysts recommend buying Costco shares and now five have a hold rating. Zero analysts have a sell rating yet.

Costco shares enjoyed the support of Wall Street as its stock climbed more than 80 percent the last five years, much more than most other retail stocks. The low-price warehouse club bred loyalty that trumped the online competition facing the industry. Now analysts believe that may not be enough as this new threat emerges.

Trussell noted that many of the positive catalysts for Costco are now in the past, including the profitability gain from switching to Citibank's Visa credit card, the announcement of its special dividend and its quarterly dividend increase to 50 cents from 45 cents.

On the flip side, not everyone on Wall Street is jumping ship. Cowen reiterated its outperform rating and $190 price target for the retailer Monday, saying Costco will survive Amazon's onslaught.

"Our take is that simple competitive advantages form a defensive moat, for now, vs. AMZN Prime's unstoppable rise," Cowen analyst Oliver Chen wrote in the report. "We believe COST's vertical integration capabilities, low price leadership given a fixed low merchandise margin model, & gas and organic food penetration are factors which will drive continued consistency in the generation of positive physical store traffic."

Costco did not immediately respond to a request for comment for this story.

— CNBC's Michael Bloom contributed to this story.

With Whole Foods, Amazon on collision course with Wal-Mart .
Some industry observers say Amazon will find it difficult to use Whole Foods to pull away Wal-Mart shoppers because the two stores appeal to different customers. But Michelle Grant, head of retailing at market research firm Euromonitor, said Amazon could use an obscure part of the Whole Foods portfolio - Whole Foods 365 - to lure Wal-Mart shoppers.Whole Foods 365 offers private-label goods and lower prices than typical Whole Foods stores, and is targeted at younger, value-conscious shoppers. Amazon could provide the financial capital and tactical ability to build that into something big.

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