Friday, October 28, 2016

AMAZON TAKES HIT AS COSTS SURGE

Are analysts correct? Or is it a failure to understand what Amazon is doing and building? 

Amazon Takes Hit as Costs Surge

Results disappoint as retail giant invests heavily on warehouses, trimming delivery times

Amazon is targeting new growth markets like fashion and beauty, where analysts expect quick gains due to its relatively small market share. ENLARGE
Amazon is targeting new growth markets like fashion and beauty, where analysts expect quick gains due to its relatively small market share. Photo: Ross D. Franklin/Associated Press
Amazon.com Inc. posted its lowest quarterly profit in a year as it invested heavily to meet consumer demand for more orders delivered faster.
The online retail giant said Thursday that opening new warehouses and shipping items with shorter delivery times caused its costs to soar in the third quarter. The company predicts heavy investments will continue through the rest of the year. Amazon opened 23 warehouses world-wide to fill orders since July, after opening just three in the first half of the year.
Adding those warehouses “was a big undertaking,” said Chief Financial Officer Brian Olsavsky on a media call Thursday. But he said it puts the retail giant in a good position to handle the flood of holiday orders in the fourth quarter.
The company’s shares fell more than 6% in after-hours trading on concerns about the higher spending, as well as a holiday outlook that fell short of expectations.
The results show “Amazon is still in investment mode, and the Street should not necessarily expect linear growth in profitability,” said Robert W. Baird & Co. analyst Colin Sebastian.
The company has been pushing its $99-a-year Prime membership program to broaden its base of loyal shoppers who often spend double their non-Prime counterparts on the site, analysts estimate. Prime promises free, fast shipping on millions of items on its site and access to video content and other perks. As the membership grows, Amazon is getting more items to the front door in as fast as an hour, increasing its shipping costs 43% in the third quarter to $3.9 billion.
“We acknowledge that’s expensive,” Mr. Olsavsky said. But “customers love it.”
The retail giant has started laying the groundwork for its own shipping business to add more delivery capacity for the holidays, with the grander ambition of one day hauling and delivering packages for itself, other retailers and consumers, according to people familiar with the matter.
It is leasing 40 planes to carry goods and buying branded truck trailers, but the investments it is making to build its own logistics operations generally break even or save on costs, Mr. Olsavsky said. “We want to control our own destiny,” he added.
Amazon accelerated its investments in its own transportation capabilities after the major delivery carriers during the 2013 holiday season failed to deliver all its orders in time.
This year, Amazon has added delivery capabilities of its own, as well as arranging capacity with its partners, Mr. Olsavsky said on an analyst call.
Amazon also is shipping more units because it has expanded a program to handle third-party seller merchandise, Fulfillment by Amazon. The company has been adding warehouses in part to accommodate that increase.
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The quarter marked Amazon’s sixth consecutive of profit after seesawing in and out of the black since its stock market listing nearly 20 years ago, despite reporting robust sales increases.
In all, its earnings rose to $252 million in the third quarter, or 52 cents a share, from $79 million, or 17 cents a share, a year earlier. Analysts surveyed by Thomson Reuters expected earnings of 78 cents a share.
Sales of $32.7 billion were nearly eclipsed by operating expenses which climbed 29% to $32.1 billion. The investments caused Amazon’s operating margin to come in at 1.8%, below the second quarter’s 4.2%.
Other areas where Amazon significantly increased its spending include promoting its video content. It is also building out teams for its Amazon Web Services cloud-computing division, and its Echo speaker device and Alexa artificial-intelligence assistant, as well as investing in its operations in India.
AWS, which has become a major factor in Amazon’s profitability, increased sales by 55% to $3.23 billion. Chief Executive Jeff Bezos has said he expects AWS, which rents computing power to a variety of startups, government agencies and other corporations, to reach $10 billion in sales this year, even amid competition from Microsoft Corp. and Alphabet Inc.
Amazon issued revenue guidance of $42 billion to $45.5 billion for the fourth quarter, when holiday sales—and its ability to deliver those orders on time—are critical to its success. Analysts were looking for $44.6 billion, according to Thomson Reuters.
Amazon reported a loss of $541 million for its international segment, steeper than its loss of $208 million a year ago. On the conference call with analysts, Mr. Olsavsky attributed that to spending on expansion, including in India, something that should continue into the fourth quarter. “By far, the biggest individual thing [affecting margins] is the investment that we continue to make,” he added.
Write to Laura Stevens at laura.stevens@wsj.com