Amazon forecast shows cracks in e-commerce dominance
Expenses soar as online retailer prepares for fierce competition from challengers
Amazon.com Inc. reported a steep jump in quarterly expenses and gave a disappointing profit outlook, blunting its momentum as the e-commerce giant prepares to enter the grocery store business by buying Whole Foods Market Inc.
The results and forecast show the world’s biggest online retailer is preparing for stepped up competition from rival Wal-Mart Stores Inc. and cloud-computing challengers Microsoft Corp. and Alphabet Inc.
Investors have put increasing faith in chief executive officer Jeff Bezos to keep the company growing by entering new categories such as groceries and appliances, and expanding abroad.
Their confidence has sent the stock up 39 per cent this year and was unfazed by the announcement that Amazon would spend US$13.7 billion for Whole Foods, the company’s biggest-ever acquisition. But the support took a turn in extended trading after Thursday’s results were reported, with shares falling as much as 4.3 per cent to US$1,001.80.
Second-quarter expenses increased 28 per cent to US$37.3 billion.
Sales gained 25 per cent to US$38 billion, the Seattle-based company said in a statement. Net income declined to US$197 million, or 40 cents a share, from US$857 million, or US$1.78 a share, a year earlier. Analysts estimated profit of US$1.42 a share on revenue of US$37.2 billion, according to data compiled by Bloomberg.
“Spending is always a concern with Amazon, but investors eventually give Amazon a pass because Amazon invests in growth opportunities,” said Victor Anthony, an analyst at Aegis Capital Corp.
The company is expanding into India and Australia, speeding up delivery times to as little as an hour on select products, adding new skills and devices for its voice-activated Alexa platform, and producing original movies and shows. Amazon hired more than 30,000 new employees “in the last few months,” Bezos said in the statement.
Chief financial officer Brian Olsavsky said the company’s spending for video programming, devices and expanded warehouse capacity around the country will continue in anticipation of the peak spending season.
The third quarter “is generally a high investment period for the holiday,” he said.
Amazon forecast operating earnings in the period ranging from a loss of US$400 million to a profit of US$300 million. Net sales will be US$39.25 billion to US$41.75 billion. Analysts estimated operating income of US$863.5 million on US$40 billion in sales. The company reported operating income of US$575 million on sales of US$32.7 billion in the third quarter a year ago.
The forecast excludes the deal for Whole Foods, where Amazon is betting it can replicate its online selling success. With 460 stores across the U.S., the acquisition is a major push into the US$800 billion grocery category dominated by Wal-Mart, which has more than 26 per cent of the market. The upscale grocery-store chain on Wednesday reported improving results in the second quarter, with sales declining less than analysts expected.
Amazon dominates e-commerce in the U.S. with its US$99-a-year Amazon Prime subscription, which includes delivery discounts, music and video streaming and is intended to keep shoppers engaged with the website. The company had 85 million Prime subscribers in the U.S. as of June 30, an increase of 35 per cent from a year earlier, according to Consumer Intelligence Research Partners. Amazon’s subscription services revenue, which is mostly from Prime memberships, increased 51 per cent to US$2.17 billion in the quarter — faster than 49 per cent in the previous quarter.
Revenue from Amazon Web Services, its profitable cloud-computing division, increased 42 per cent to US$4.1 billion. The unit’s sales increased 43 per cent in the previous quarter.
Sales of warehousing, packaging and other logistics services Amazon provides for e-commerce merchants increased 38 per cent to US$7 billion. That’s faster than 34 per cent in the previous quarter.
Spending is always a concern ... but investors eventually give Amazon a pass because (it) invests in growth opportunities.