Commentary

Amazon's Investment In One-Day Shipping Proves Costly

Sales were up 24% to nearly $70 billion for the third quarter, Amazon announced yesterday, but getting those products to customers by the next day is proving to be a costly endeavor. For the first time in two years, profits dropped, and the stock got clobbered in after-hours trading.

“The world's largest ecommerce company on Thursday posted third-quarter earnings that badly missed expectations, despite better-than-expected sales. Its revenue prediction for the all-important fourth quarter, during the peak holiday retail season, was also soft,” writesCNET’s Ben Fox Rubin. “Shares plunged 7% after hours on the earnings and guidance misses.”

To be precise, on a per-share basis, Amazon said it had net income of $4.23. 

“The results missed Wall Street expectations. The average estimate of 12 analysts surveyed by Zacks Investment Research was for earnings of $4.46 per share,” the AP automated insights feature reports. But “the online retailer posted revenue of $69.98 billion in the period, surpassing Street forecasts. Twelve analysts surveyed by Zacks expected $68.67 billion.”

“Third-quarter results include sales from Prime Day, which the company called its biggest shopping event in history. Amazon previously said Prime Day sales surpassed those of Black Friday and Cyber Monday combined, with more than 175 million items sold over the 48-hour event,” CNBC’s Eugene Kim reminds us. Before the overnight falter, its stock was up 18% this year, he points out.

“A primary culprit for the sour numbers was Amazon's new push to make two-day Prime shipping into just one day, which has forced the online retailer to spend billions of dollars to ramp up its transportation and warehouse infrastructure and buy more inventory to bring popular products closer to customers,” CNET’s Rubin writes. 

“Amazon’s world-wide shipping costs jumped 46% to $9.6 billion from the previous year as the company processes higher expenditures related to its one-day shipping program for Prime subscribers. Online sales growth has accelerated as Amazon has invested more into one-day shipping. Sales in online stores rose 22% in the third quarter, double the growth rate a year earlier,” Dana Mattioli writes  for The Wall Street Journal.

“In the fourth quarter, the company expects to spend roughly double what it did in the second quarter on one-day shipping, or $1.5 billion, to facilitate the program, CFO Brian Olsavsky said on a call with media Thursday.”

Amazon founder-CEO Jeff Bezos sees nothing but good coming out of the initiative.

“Customers love the transition of Prime from two days to one day -- they’ve already ordered billions of items with free one-day delivery this year,” he states  in a news release accompanying the earnings report. 

“It’s a big investment, and it’s the right long-term decision for customers. And although it’s counterintuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfillment centers very close to the customer -- it simply becomes impractical to use air or long ground routes,” Bezos adds.

“Bezos has promised since the company’s initial public offering to invest for the long haul, and he is proving again his willingness to endure a little short-term pain in a bid to expand,” Bloomberg’s Matt Day observes . He points out “delivery is hardly the only place Amazon is investing.”

“Olsavsky said the company continues to build out software development and sales and marketing teams for the Amazon Web Services cloud computing unit, and hire for roles supporting its devices business, streaming video unit and international operations. Amazon’s costs for technology and content -- largely salaries related to employees in research and development and infrastructure for AWS data centers -- jumped 28% to $9.2 billion. The company’s total workforce increased 22% to 750,000,” Day writes.

Those investments are having an impact on the bottom line.

“While the cloud business, Amazon Web Services, continues to be the company’s most profitable division, its growth and margins are slowing. Operating income at AWS, whose services are used to run technical infrastructure at companies including Unilever and Pinterest, jumped 9% from the same period a year ago to $2.3 billion. Sales rose 35% to $9 billion. Just three months ago, the unit’s operating income climbed 29% as sales rose 37%,” Jay Greene writes  for The Washington Post, which is owned by Bezos.

“Amazon’s digital advertising business, which sells space to big brands as well as merchants hawking wares on its retail site, posted big gains, too. In the period, Amazon’s ‘other’ category, which is primarily derived from advertising, grew 45% year over year to $3.6 billion,” Greene continues.

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