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Amazon reports growing pains: One-day delivery costs a lot

Amazon Prime boxes
Amazon Prime boxes are loaded on a cart for delivery.
(Mark Lennihan / Associated Press)

Amazon.com Inc.’s earnings results were marred by a surge in costs tied to its push for one-day delivery, worrying investors who had grown accustomed to almost two straight years of fattening profits.

Moving millions of products closer to customers to enable one-day delivery proved more costly and complicated than expected, driving up expenses and reducing efficiency in the second quarter, Chief Financial Officer Brian Olsavsky said Thursday on a conference call. The investment will put a strain on earnings for the rest of the year, but it has already spurred consumers to buy more on Amazon’s website and helped revenue growth rebound, he said.

“It does create a shock to the system now,” Olsavsky said of the speedier delivery effort. “We’ll work through that over the next several quarters, and when the dust settles, we’ll return to increased efficiency.”

The Seattle company announced in April that it would spend $800 million to speed up delivery times for its best customers, a response to competition from rivals such as Walmart Inc. Amazon’s spending in the April-through-June period ended a six-quarter streak of increased profits from its North American e-commerce business that had fueled investor enthusiasm.

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The company reported second-quarter profit was $5.22 a share, falling short of analysts’ average estimate of $5.56 a share. Revenue climbed 20% to $63.4 billion. Analysts, on average, expected $62.5 billion, according to data compiled by Bloomberg. The company also said operating income in the current quarter will be $2.1 billion to $3.1 billion, well below analyst estimates of $4.34 billion.

The third quarter is the period when Amazon typically invests in its facilities for the busy holiday shopping season at the end of the year, so big spending on the one-day shipping initiative spooked investors, said R.J. Hottovy, an analyst at Morningstar Inc.

“The company’s been pretty upfront about investing in one-day shipping,” he said. “This is their heaviest investment period of the year, so it’s when we’re most likely to see a pullback.”

Amazon’s spending growth in the second quarter accelerated across the board, including for marketing to promote the annual Prime Day sale and on technology and content, which includes money for engineers and video programming. Operating expenses increased 21% to $60.3 billion in the quarter, faster than revenue. Shipping costs jumped 36% to $8.13 billion.

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Although e-commerce remains Amazon’s biggest source of sales, other businesses — such as cloud computing, logistics for online merchants and advertising — are growing faster and now generate almost half of the company’s quarterly revenue. In addition to greater competition, Amazon faces increasing scrutiny from government antitrust regulators and lawmakers who argue that Amazon acts like a monopoly to dominate online shopping. The U.S. Department of Justice announced Tuesday that it was opening a broad antitrust review into whether big technology companies are using their power to blunt competition.

“Regulator risk is the No. 1 risk for the big tech companies, including Amazon,” said Tom Forte, an analyst at D.A. Davidson & Co.

Amazon reported its results Thursday after the close of regular trading. Its shares fell 1.6% to $1,943.05 on Friday. The stock has climbed nearly 30% this year, pushing the company’s market value near the $1-trillion mark it surpassed briefly in September.

Amazon Web Services sales increased 37% to $8.38 billion in the second quarter, missing analyst estimates of $8.5 billion. Cloud computing is one of Amazon’s most profitable businesses, fueling investments in other parts of the company.

Despite the disappointing profit outlook, Amazon has a track record of making long-term investments that ultimately pay off, said Ron Josey, an analyst at JMP Securities.

“They’ve got some growing pains ... but they’re managing that pretty well,” he said. “That can only be a good thing longer-term, and, frankly, that’s how I think the market will be looking at it.”


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