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Wayfair: No major impact from Supreme Court tax decision

BY Marianne Wilson

Online home furnishings retailer Wayfair isn’t expecting any big impact on its business about losing the case it was a party to.

Responding to the U.S. Supreme Court decision in South Dakota v. Wayfair, the company said it already collects and remits sales tax on about 80% of its U.S. orders, with the number growing as it expands its logistics footprint. Wayfair had net revenue of $5.2 billion in its last fiscal year.

“As a result, we do not expect today’s decision to have any noticeable impact on our business, as it may on other retailers who do not currently collect and remit sales tax,” the retailer stated.

In addition to its namesake brand, Wayfair also operates several other brands, including Joss & Main, AllModern, Birch Lane and Perigold. The company is based in Boston.

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Commentary: Compliance with sales tax ruling will be ‘problematic’

From an economic perspective, today’s Supreme Court ruling will come as a relief for states desperate for revenue. It will also be welcomed by those physical and omnichannel retailers which have a national presence and, therefore, already charge and remit sales tax in most states.

The losers from the ruling are online-only retailers, especially smaller players, and consumers who will end up paying more for products. By our calculation, the additional costs for consumers could be up to $15.2 billion a year.

The concern for retailers like Wayfair is that their prices will now effectively rise across many states. This weakens one of their competitive advantages over both physical players and those larger online and omnichannel retailers which have more of a national presence. However, in our view, this outcome is fair. It means that retailers will now compete on a level playing field.

A more problematic issue is one of compliance. Because of county and city taxes, there are well over 10,000 tax jurisdictions across the United States. Within each, there are various exemptions and rates for different products. This results in an extremely complex and intricate web of rules, that will require a lot of processing by retailers in order to calculate the taxes owed to each state and locality.

While larger retailers will be able to cope with this, it will still impose an initial burden on them which may further increase costs that could be passed on to consumers. That said, this is nothing that physical retailers operating across multiple locations don’t already have to deal with.
The challenge for smaller players will be significant and the concern here is that complexity could stymie innovation and entrepreneurialism. However, in our view, most states will likely exempt smaller players and, even if they don’t, their small scale will probably allow them to escape scrutiny.

As unfortunate as these problems and consumer losses are, in our view the Supreme Court’s ruling and negation of previous judgments which prevented the taxation of some online transactions by states, is correct and valid. The Court cannot and should not concern itself with practicality. It must only concern itself with the law and the Constitution.

In that regard, the judgment is reasonable. Provided states do not engage in discriminatory taxation, they have a sovereign right to sales taxes on business conducted within their jurisdiction. The courts and the federal government can only step in when taxation is levied unfairly and unequally to different actors or businesses and therefore impedes interstate commerce.

All that noted, we do not expect this to be the final ruling by the Court, as retailers and states are likely to raise further challenges on other grounds.

 

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Kroger Q1 profit beats Street; gives upbeat outlook

BY Marianne Wilson

The Kroger Co.’s investments to make itself more competitive in the rapidly evolving grocery sector are paying off as the supermarket giant delivered a strong first quarter performance that topped the Street.

Net income totaled $2.03 billion, or $2.37 per share, in the quarter ended May 26, up from $303.0 million, or 32 cents per share, in the year-ago period. (The gain includes the sale of Kroger’s convenience store business, which added $1.59 per share.) Adjusted earnings per share was 73 cents. Analysts had expected earnings per share of 63 cents.

Revenue increased 3.4% to $37.5 billion. Analysts had expected sales of $37.3 billion. Digital sales surged 66%.

Same-store spaces, including Kroger Specialty Pharmacy and ship-to-home but excluding fuel, rose 1.9%.

Kroger made some key moves in the first quarter, including extending its partnership with U.K.-based online grocery retailer Ocado, Kroger will be Ocado’s exclusive partner the U.S., a move that will enable the grocer to leverage Ocado’s smart platform, which supports online ordering, automated fulfillment and home delivery capabilities.

Also in the quarter, Kroger said it is acquiring Home Chef ,the country’s largest private meal kit company by sales.

Analyst Neil Saunders of Global DataRetail commented that “as much as Kroger is managing the daily dynamics of the market, it also has one eye on the future.”

“The recent partnership with Ocado and the Home Chef merger agreement both speak to the fact that Kroger is looking to stay one step ahead of the competition by gaining a toehold in rapidly-growing segments of the market,” he said. For more analysis, click here.

In a statement, Kroger chairman and CEO Rodney McMullen said the chain’s Restock Kroger program, which involves major investments in technology and other areas, was off to a fantastic start.

“Everything we do supports our customers engaging seamlessly with Kroger,” he said. “Kroger is creating the future of retail by innovating our core business and adding exciting partnerships like Ocado and our planned merger with Home Chef. We are on track to generate the free cash flow and incremental FIFO operating profit that we committed to in Restock Kroger.”

Kroger expects 2018 same-store sales growth excluding fuel to range from growth of 2% to 2.5%, ahead of Street estimates for 1.9% growth. It also raised the low end of its earnings guidance to a range of $3.64 to $3.79, from $3.59 to $3.79. Adjusted EPS is now expected to be in the range of $2.00 to $2.15, up from $1.95 to $2.15.

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