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As FedEx and UPS change their pricing models, avoid these 9 e-commerce stocks

Each week I trade insights with some of the most influential minds (CEOs, boards, shareholders, analysts, and leading journalists) in the e-commerce sector. If you enjoy this article please follow me on Twitter @abegarver 

DIM pricing may send shares of certain e-commerce companies into a free-fall

The convenience of online shopping with in-home delivery, has resulted in an increase in the number of lighter weight packages in bulkier boxes being shipping to homes across the world.

As of January 2015, a new dimensional weight pricing model adopted by two dominate e-commerce parcel shipping companies (FedEx and UPS) now charges retailers for ground delivery according to package size rather than actual weight.

Larger shippers (Amazon) and Internet retailers aligned with 3PLs like Red Stag Fulfillment (RSF), will have the advantage as they have become very astute in collecting and analyzing data. However many e-commerce companies still don’t use 3PLs (third-party logistics providers).

‘Today’s Mom’ pregnancy pillow for example

In it’s April 2015 cover story, BabyAge.com’s founder and CEO Jack Kiefer told Internet Retailer magazine that, “Dimensional pricing resulted in one of its hottest products - theToday’s Mom pregnancy pillow - shipping as an 18-pound package, nearly double its actual 10-pound weight.”

“If you take the DIM weight factor and other standard rate increases and residential surcharges, it got to the point where we were looking at it costing $9 to ship a 1-pound package across the street.”

Cost to ship the world’s most popular metal detector – up 500%

According to Kellyco Metal Detectors, the world’s oldest and largest retailer of metal detectors, “Dimensional pricing resulted in one of our hottest products -the Garrett Ace 250  - shipping as an 15-pound package, over five times its actual 2.7-pound weight.”

I asked David Auerbach (whose father Stu founded KellyCo) what he plans to do. He said moving to FBA (Fulfillment by Amazon) was not a good fit, but RSF is. Customers simply pay us a $5 flat rate.

How much are shipping fees up?

According to the same IR article, “How much shipping fees are up varies by product and a retailer’s volume. Some say prices are up as much as 30% which includes an average 4.9% annual rate high, various residential and fuel cost surcharges.”

I’m not an economist, but I can spot a trend

At the ‘water coolers’ in e-commerce companies I’m hearing three (3) questions of concern:

  1. If we pass this (DIM pricing) cost on to our customers how many will we lose?
  2. What will our margins be if we eat the cost?
  3. Will we still be in business 1 year from now?

Shipping expense warnings are in SEC filings

From the top of page 15 of Zulily’s 10-K (filed December 28, 2014), “Our relatively slower delivery times (average order-to-ship time of 13.7 days) may place us at a competitive disadvantage to other ecommerce retailers and may cause customers to stop purchasing from us.”

“If we are required to decrease our delivery times to address this competition or to meet customer demands, we may be required to incur additional shipping costs, which we may or may not be able to pass on to our customers, or to change our operations to carry additional inventory and face additional inventory risk, either of which could adversely affect our business, financial condition and operating results.”

What does this uncertainty mean for shares in specific e-commerce stocks?

Between April 27 (Overstock) and May 11 (Wayfair) the nine (9) companies below will be announcing earnings. As the publisher of the ‘Moving the e-Markets’ Valuation Index, here are my thoughts as of April 18th, 2015.

I believe nine (9) stocks with direct exposure to DIM pricing should be avoided until the dust settles. In order of EBTIDA valuation they are:

  1. Zulily
  2. Groupon
  3. Overstock
  4. U.S. Autoparts
  5. Blue Nile
  6. Nutrisystems
  7. PetMed Express
  8. 1-800-Flowers, and
  9. Wayfair (EBITDA valuation not meaningful)

The views in this article are my own and not those of my employer, BG Strategic Advisors

If you are fascinated by the e-commerce sector like me, or want an edge in regard to direction of stocks, please follow me on Twitter @AbeGarver

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RIP Lou Reed… “Transformer,” produced by David Bowie, in 1972, included “Perfect Day,” and “Walk on the Wild Side,” arguably his best-known song, an ode to the underground sex- and drug-fueled lifestyle of a cross-dresser, with brooding lyrics and a thumping drum-and-bass shuffle. Cover photograph, Royal Festival Hall, London by Mick Rock, 1972. Rest in peace, Mr. Reed. You were truly a transformative artist and a much loved New Yorker…