Friday, February 3, 2017

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Amazon continues to take control of its supply chain for customer experience, inventory velocity, time compression. Real story for competitors.

Amazon’s Profit Jumps, but Sales Growth Disappoints

Shares slide as company also issues lackluster sales guidance for current quarter


Amazon reported its seventh straight profitable quarter.
Amazon reported its seventh straight profitable quarter. Photo: Reuters
Amazon.com Inc.’s revenue growth and investments have for years come at the expense of profit. Now, the retail giant appears to have exhibited more discipline to preserve its bottom line.
The Seattle-based retail giant on Thursday said fourth-quarter profit jumped 55% to $749 million, topping the company’s own guidance. On the other hand, revenue increased 22% to $43.7 billion, hitting the midpoint of Amazon’s target, and below analysts’ expectations.
“There’s always a number of things that can impact customer spending, both positively and negatively during any quarter,” said CFO Brian Olsavsky on a conference call. “What we do, is continue to focus on the things we can directly control: for us that’s price, selection, customer experience. And on those dimensions we felt we made great progress.”
Many retailers resorted to heavy promotions during the critical holiday season last year. As a result, traditional brick-and-mortar chains ranging from Target Corp. to Macy’s Inc. have warned on profits and reported disappointing sales.
Amazon said promotions—which Mr. Olsavsky called “a cost of doing business”—weren’t a major factor in fourth-quarter revenue.
Amazon’s stronger margins likely reflect more discipline in spending and fewer promotions at the expense of profit, as well as a larger percentage of sales stemming from its third-party sellers, analysts said. Those sales are nearly pure profit margin because Amazon doesn’t have to buy and hold the product itself. It also gets paid for items that sellers ship in for Amazon to fulfill.
The company has “plenty of runway to continue with the present investment cycle,” said Charlie O’Shea, lead retail analyst at Moody’s Investors Service.
Amazon’s stock was trading down more than 4% after-hours Thursday on disappointing fourth-quarter revenue and softer-than-expected guidance for the first quarter.
Amazon often has bucked retail trends by dominating online sales. It commanded an estimated 42% of total holiday online spending growth last year, according to Slice Intelligence, which analyzes customer receipts. Apple Inc. was second, accounting for 5% of holiday e-commerce growth.
Growth and investments have been Amazon’s priorities since it was a startup. In his first letter to shareholders in 1997, Chief Executive Jeff Bezos declared that his strategy for creating shareholder value prioritized customer and revenue growth “because we believe that scale is central to achieving the potential of our business model.”
But the Amazon’s streak of seven profitable quarters—with a big jump in the most recent period— may come under pressure as the company enters a heavier period of investment.
Last month, Amazon pledged to create 100,000 full-time jobs in the U.S. by mid-2018—a tip of the hat to President Donald Trump’s employment drive. That would require building many more warehouses, some of which have been planned or announced.
Moreover, 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.
Amazon this week announced it is building its first air cargo hub in Kentucky, a $1.5 billion project. It also recently made its debut in the ocean-freight sector, handling shipment of goods to its U.S. warehouses from Chinese merchants selling on its site. It is taking on a role it previously left to global freight-transportation companies.
Those investments come in addition to Amazon’s branching out into industries other than retail, including web services, smart-home devices and music and video content. It recently became the first tech company to receive an Academy Award nomination for Best Picture.
Amazon is reaping the rewards of one project it has plowed money into: Prime, its $99 annual membership program that includes perks such as free, two-day shipping, and music and video content.
Mr. Olsavsky, noting the tens of millions of customers who joined Prime last year, said, “We’re pleased with the results we’re seeing.”
Write to Laura Stevens at laura.stevens@wsj.com