Amazon Plans Fall Cleaning; How Will Shares Be Affected?

| About:, Inc. (AMZN)

I sell ski wax on (NASDAQ:AMZN) and have utilized the Fulfillment-by-Amazon (FBA) service for the past few years. It's a great value-added service that allowed me to sit back and relax (get a college education) while Amazon handled the storage, picking, packing, and shipping of my items. My FBA status also occasionally allows me to learn about upcoming Amazon initiatives that could affect the broader company and shareholders.

I recently received an email introducing an upcoming event called the Long-Term Storage program (LTSP). The email describes how the LTSP aims to prevent outdated or obsolete inventory from cluttering warehouses so that there is more room for popular-selling items, especially during busy seasons. Amazon's ever-expanding sales fuel the need for new space, and a Goldman Sachs (NYSE:GS) report estimated that Amazon would expand warehouse space by 40% in 2011 to about 24.5 million square feet. This increase in space, coupled with the LTSP fall cleaning, should allow accommodation of many more Amazon and FBA-seller items in warehouses this holiday season.

There will be some financial impacts from the LTSP fall cleaning. When the program takes effect on August 15, there will be a storage cost assessed against inventory that is over 365 days old; FBA sellers will be charged $45 per cubic foot of such inventory. The normal storage fee is either 45 or 60 cents per month (the more expensive rate is imposed during the holiday season), so sellers who do not remove aged inventory are going to be hit with a much bigger storage fee than they are accustomed to.

To provide a quick back-of-the-envelope calculation of Amazon’s potential take, I'm going to assume that 24 million square feet of space translates into 200 million cubic feet of storage space. (I am no supply chain expert, so that number may be a very rough estimate.) Half of that space is in the United States (100 million cubic feet), and FBA sellers probably only occupy a fraction of it. Assuming that FBA items take up 20% of warehouse space, about 20 million cubic feet of FBA items are sitting in warehouses right now. If 0.5% (another guesstimate) of those items are >365 days old and are not removed, that means that 100,000 cubic feet will be assessed at $45 each, and Amazon will be collecting $4.5 million extra in August from its FBA merchants.

However, Amazon is giving sellers the opportunity to remove old items for reduced rates prior to the August 15 cleanup. Between now and August 15, sellers can remove units for just $0.20 each. It seems unlikely that 20 cents covers the costs of picking, packing, and shipping items, so Amazon will probably be losing money if sellers elect to have items returned.

Amazon estimates that books take up about 1/40th of a cubic foot while a toy takes up about 1/10th; the average item may be 1/20th of a cubic foot. Assuming that 100,000 cubic feet of items are returned, Amazon will be shipping 2 million items back to sellers. Estimating the cost of shipping is too complicated because of size, weight, and carrier discounts, but Amazon's $0.20 charge isn't likely to cover the cost.

I think that there are two takeaways from this development. First, there's likely to be some charge, item or footnote in Amazon's Q3 earnings related to this; it may be a positive or negative number. It doesn't seem like it'll be huge, but considering Amazon's $231 million in earnings in Q310, a few million dollars in red or black ink will affect earnings by a percent or two.

More importantly, it's a sign that Amazon's business continues to expand at a very rapid rate. I have often questioned the appropriateness of Amazon's stock market valuation (and have thus far been proven wrong), but the strength of the business demonstrated by Amazon's need to try this hard to maximize storage space for this holiday season and beyond is a very impressive sign.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.