Amazon’s spending on one-day delivery and other initiatives sends profit down year-over-year for first time since 2017, forecast calls for even more spending in holiday quarter
Amazon.com Inc. profit fell for the first time in more than two years in the third quarter, and the company expects another earnings decline in the holiday-shopping season, which sent shares down more than 7% in late trading Thursday.
Amazon AMZN, +1.06% reported third-quarter profit of $2.1 billion, or $4.23 a share, on sales of $69.98 billion after the market closed Thursday. Sales rose from $56.58 billion a year ago, but earnings declined from $5.75 a share, the first time Amazon earnings have shrunk year-over-year since June 2017. Analysts on average expected Amazon to report earnings of $4.59 a share on sales of $68.83 billion, according to FactSet.
Amazon had been on a run of record profits until last quarter, when increased spending on the transition to one-day delivery for Prime customers and other initiatives began showing up in its results. The e-commerce giant reported profit topping $10 billion in 2018, more than triple its previous annual record, and had reported record quarterly profit totals for four consecutive quarters before breaking that streak with second-quarter results.
“We are ramping up to make our 25th holiday season the best ever for Prime customers — with millions of products available for free one-day delivery,” Amazon Chief Executive Jeff Bezos said in Thursday’s earnings announcement. “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. It’s a big investment, and it’s the right long-term decision for customers.”
Amazon’s forecast for the holiday quarter came in short of estimates for both profit and sales, as the company predicted net revenue of $80 billion to $86.5 billion with operating income of $1.2 billion to $2.9 billion. Analysts on average were predicting fourth-quarter operating profit of $4.19 billion on sales of $87.39 billion, according to FactSet, after Amazon reported operating income of $3.79 billion on revenue of $72.38 billion in the holiday quarter a year ago.
“Significant investments tied to the rollout of one-day shipping will depress Q4 profits, we assume compounded by the shorter holiday shopping window,” Baird Equity Research analyst Colin Sebastian said in a note after the numbers hit.
In a conference call Thursday afternoon, Chief Financial Officer Brian Olsavsky said that Amazon’s holiday-season guidance for a revenue-growth decline from the third quarter to the fourth quarter was mostly related to the international e-commerce business. Specifically, he noted that India’s Diwali festival took place completely in the fourth quarter last year and started in the third quarter this year, while Japan increased its consumption tax beginning Oct. 1.
Amazon shares increased 1.1% to $1,780.78 in the regular session Thursday, then plunged toward $1,650 a share in after-hours trading after results were announced. The stock has gained 18.6% in 2019, but declined more than 10% in the past three months, as the S&P 500 index SPX, +0.19% fell about 0.5%.TimeAmazon.com Inc.Nov 18Jan 19Mar 19May 19Jul 19Sep 19US:AMZN$1,200$1,400$1,600$1,800$2,000$2,200
Amazon prepped investors and analysts for the spending increase and resulting profit decline, projecting an $800 million charge in the second quarter for the one-day delivery change. Amazon ended up spending more than that in the second quarter, however, and Chief Financial Officer Brian Olsavsky said in July that Amazon would spend even more in the third quarter.
Olsavsky said in the call that the fourth quarter will see even larger costs from one-day delivery efforts.
“So, as we head into Q4 we’ve added what’s just nearly $1.5 billion penalty in Q4 year-over-year for the cost of shipping, which essentially is transportation costs, the cost of expanding our transportation capacity, things like adding additional roles and shifts in our warehouses,” the Amazon CFO said.
Amazon’s worldwide spending on shipping jumped 46% year-over-year in the third quarter to a record $9.6 billion, more than a half-billion dollars over what Amazon spent in the busier holiday season a year ago. The company, which cut back on hiring a year ago after absorbing the Whole Foods workforce and hiring quickly in 2017, also increased its total employee count by 22% to 750,000 people. Amazon added nearly 100,000 employees just in the third quarter, according to Thursday’s release, which Baird analyst Sebastian deemed the “most surprising metric” in the report.
“The biggest driver at this time is the people that we’re adding for fulfillment and transportation roles, especially as we head into Q4 and add this additional transportation capacity to service one-day [delivery],” Olsavsky said when asked about the third-quarter hiring.
Amazon Web Services, Amazon’s leading cloud-computing business, reported revenue of $9 billion and operating income of $2.26 billion, 71.6% of Amazon’s total operating profit. Revenue grew 35% from the year before, down from a growth rate of 46% at the same time last year, as declining growth rates for cloud-computing services such as Microsoft Corp.’s MSFT, +1.97% Azure continue to be an issue for the largest players.
The domestic e-commerce business provided net sales of $42.64 billion and operating income of $1.28 billion, while international operations recorded an operating loss of $386 million on sales of $18.35 billion. Amazon’s brick-and-mortar retail offerings produced their lowest quarterly revenue total since Whole Foods Market was officially absorbed in 2017, with $4.19 billion in net sales falling 1.3% from the year before and 3.2% sequentially.