In the late 1990s and early 2000s, Ebay was the big cheese of online retail. Through dial-up modems, millions flocked to the site to auction off used VHS tapes and hunt for rare stamps.
Today, auctions account for roughly one in ten sales on the Ebay marketplace. Most are direct “buy-it-now” transactions such as you would find on Amazon. Yet Amazon, the new big cheese of ecommerce, hasn’t managed to knock Ebay out of the game.
Ebay’s main business is its online marketplace of the same name. It also owns Stubhub, an online ticket exchange for concerts, football matches and the like. The company makes its money by charging fees on sales on these platforms.
It competes with Amazon and increasingly with bricks-and-mortar retailers that are growing their presence online. Walmart, for example, is doing what Amazon did a few years ago: encouraging third-party merchants to set up inside its online shop and taking a cut of sales.
Ebay is betting that a revamp of its marketplace will attract more buyers and sellers and encourage existing traders to do more business. Visitors to the site are now met with product listings that are personalised to them.
Ebay is rolling out free three-day shipping, supposedly to compete with Amazon’s two-day shipping for Prime members. Ebay now has a price-match guarantee on about 50,000 items. It is talking to big brands about setting up shops inside its marketplace.
The company has been spending a decent amount on marketing since the start of the year, pushing especially hard on fashion. It is also trying to boost its presence on search engines. This, essentially, means paying Google to push links to Ebay pages higher up search result rankings.
With free cash flow of $720 million at the end of the third quarter, Ebay can afford to keep spending, although it is puzzling why, given its growth ambitions, it keeps buying back shares: $907 million in the last quarter alone, and $3 billion altogether last year. You won’t catch Jeff Bezos doing that at Amazon.
Two metrics are important for measuring Ebay’s growth: “active buyers”, which is the number of accounts that closed at least one transaction in the last 12 months, and “gross merchandise volume”, the value of closed transactions in a defined period.
By the end of September, Ebay had 168 million active buyers compared with 171 million at the end of June and 165 million at the end of September a year ago. The decline was down to the sale of Ebay’s India business to Flipkart, a local rival. Adjusting for this deal, Ebay said that it added nearly 2 million active buyers between the end of June and the end of September this year.
Gross merchandise volume in the third quarter was $21.7 billion. This was up from $21.5 billion at the end of June and $20.1 billion at the end of September last year — or, adjusting for the Flipkart sale, up from $20.4 billion and $18.9 billion respectively.
For the third quarter, active buyers and gross merchandise volume were ahead of analysts’ expectations, as was revenue of $2.41 billion and profit of $523 million. A second consecutive trimming of the full-year profit forecast was the disappointment, however, pushing shares down by 4 per cent.
Active buyers and gross merchandise volume may be growing but the path upwards isn’t steep. Ebay could boost these numbers by acquiring a smaller online marketplace, such as Etsy, which is worth about $1.9 billion.
Ebay could not, however, buy an upmarket grocery chain the size of Whole Foods for $13.7 billion, as Amazon did earlier this year. It doesn’t have the firepower to become the consumer goods conglomerate that Amazon wants to be.
Nonetheless, the company is more than a niche player in the world of ecommerce, which continues to grow. And, with competition regulators across the world beginning to worry about Amazon’s dominance, it may yet have a larger role to play.
MY ADVICE Hold
WHY Ebay’s turnaround plan is yet to bear fruit but the company has weathered intense competition to give it a solid base from which to grow
Travis Perkins
Though it is less than 10 per cent of profits these days, the problems at Travis Perkins’ plumbing and heating division have rather overshadowed the performance of the rest of the business in recent years. That market has faced a number of challenges, such as an abrupt fall in demand once a government scrappage scheme on old boilers ceased.
The sale of some products has migrated online, leaving behind too many physical outlets, while some low-cost competition has edged into the market.
It is too early to be sure, but the third quarter figures do at least give some comfort. Like-for-like sales in plumbing and heating were up by 5.4 per cent, comfortably outstripping the 0.9 per cent rise for the year so far and against a 0.9 per cent sales fall and a 15 per cent profit decline for 2016.
Across the rest of the group it was a case of swings and roundabouts. Contracts, which serves the commercial property market, saw a 7.7 per cent rise and is clearly gaining market share. Its consumer business, the Wickes chain, was running against some strong comparative numbers and managed a 2.4 per cent rise in the third quarter, indicating some slackening as the year progressed.
By contrast the third quarter of 2016 saw consumers continuing to spend on DIY but was marked by lower demand from trade customers because of the uncertainty after the Brexit referendum, which delayed new work. General merchanting saw a 2.4 per cent rise in like-for-like sales in the quarter and an improvement over the course of the year.
It is hard to be anything but cautious over the prospects for all sides of the business. Travis Perkins is not overly stretched in terms of debt but it is too early to consider any extra returns on capital. The shares added 33p to £15.05, largely on relief that the news was not worse, but a 4.1 per cent rise in like for likes across the group really only reflects the passing on of sales price inflation of 3.9 per cent during the quarter.
The shares have fallen back from almost £17 in May. They sell on 13 times earnings but given the uncertain trading outlook, there seems no clear reason to buy.
MY ADVICE Avoid
WHY Given the clouds over outlook, shares look fair value
