Amazon Profit Down, Sales Up
Amazon.com Inc. on Tuesday reported a 32% drop in second-quarter net income, but sharp increases in sales and operating profit caught the eye of investors, who sent the online retailer’s shares up nearly 11% in after-hours trading.
Heavy discounts on merchandise and shipping charges helped boost sales, and Chief Executive Jeff Bezos vowed to continue cutting prices to attract customers and fend off competition from Wal-Mart Stores Inc. and other big retailers expanding on the Web.
Wall Street, long frustrated by that strategy, finally saw signs that the yearlong slide in Amazon’s profitability could be ending.
“We think it was a great quarter,” said Scott Devitt, an analyst with Legg Mason. “The company is well positioned going into the holiday season,” typically the busiest time of the year for retailers.
Amazon reported net income of $52 million, or 12 cents a share, for the three months ended June 30, compared with $76 million, or 18 cents, during the same period last year. A major reason for the drop: The company set aside $56 million for taxes during the quarter, up from $5 million a year before.
Operating income, which doesn’t include taxes and one-time items, increased 21%, to $104 million from $86 million a year ago.
The results beat analysts’ average profit forecast of 10 cents a share, according to Thomson Financial.
Revenue, meanwhile, jumped 26% to $1.75 billion, beating Wall Street’s forecast of $1.73 billion.
The Seattle-based company kept its full-year revenue forecast relatively unchanged, at between $8.28 billion and $8.68 billion. Amazon said it would have raised the forecast but for the strengthening dollar, which the company expects will lower revenue from its fast-growing international business by $150 million.
Amazon’s stock fell 21 cents to $37.74 during regular trading, then soared to $41.84 in the after-hours session after the earnings report was released.
Investors have seized on Amazon’s operating profit margins -- profit as a percentage of revenue excluding taxes and interest expense -- as a key measure of the company’s health. They were cheered Tuesday when Amazon reported a second-quarter operating margin of 6%.
That was lower than the 6.2% the company reported a year ago but higher than analysts were expecting. It also beat the first quarter’s operating margin of 5.7%.
The company attributed its improved profitability to strong sales by other merchants that sell their wares on Amazon.com. In exchange for letting them sell on its website, Amazon takes a cut of each sale. Since Amazon doesn’t have to carry the inventory, it can squeeze more profit from each sale.
As for the company’s aggressive discounting -- which now includes price cuts of 34% on books that list for more than $25 -- Bezos said investors would eventually benefit from the strategy. He cited Amazon Prime, in which customers pay $79 a year for two-day shipping on an unlimited number of products.
The goal is to get people to buy everything from toothbrushes to electronics without worrying about shipping costs or long waits for delivery. Amazon Prime members tended to buy more than regular customers during the quarter, he said.
“It does make it expensive for the company in the short term, but we believe that it will generate long-term returns for shareholders,” he said.
A similar rationale caused the jump in income tax. The company shifted some assets to its international operations, a move it said would increase taxes this year but reduce them over time.
International sales rose 33% to $793 million, while U.S. sales increased 21% to $960 million.
Amazon was founded 10 years ago this month as an online bookstore. Media, such as books, CDs and DVDs, remains its biggest category, and electronics and other products account for about a quarter of its sales.
