No E-Commerce Worries for Amazon?

Updated: Amazon’s (AMZN) second quarter earnings doubled from a year ago as sales jumped 41 percent and executives said that the e-tailer may be benefiting from a slowing economy courtesy of its free shipping deals.

On Wednesday, the company reported net income of $158 million, or 37 cents a share, on revenue of $4.06 billion. In the year ago quarter, Amazon reported earnings of $78 million, or 19 cents a share, on revenue of $2.89 billion.

Wall Street was expecting earnings of 26 cents a share. However, Amazon did have a $53 million non-cash gain recognized on the sale of the company’s European DVD rental assets. According to the folks at Realmoney.com (a pay site) if you back that gain out Amazon reported an in line quarter. That math would explain why Amazon popped after hours only to reverse sharply. If you’re going to back that gain out you might as well note that Amazon is getting a benefit from the weak dollar too.

Nevertheless, Amazon’s quarter was a strong one relative to a year ago–and worries about e-commerce sales being thumped in a weakening economy. As for the outlook, Amazon projected third quarter sales between $4.2 billion and $4.42 billion with operating income between $115 million and $160 million (statement).

Meanwhile, comments from Amazon CEO Jeff Bezos noting that a slowing economy is making the e-tailer a better choice than driving 10 miles to a store seemed to allay any of those concerns about one-time gains and gross margins. The chart shows how investors weren’t quite sure what to make of Amazon’s quarter.

Key points from the conference call:

• CEO Jeff Bezos was mum on metrics for Amazon’s developing businesses such as digital media delivery businesses and new efforts such as the Kindle.
• Gross margins were an issue based as analysts asked about whether Amazon was getting more aggressive on pricing–especially in North America where margins in the quarter were 25.7 percent compared to 27 percent a year ago. There’s a gulf between margins in North America and abroad. Part of the issue is that there are more third party vendors in North America. On the bright side, international sales are keeping overall gross margins flat.
• Executives said it’s too early to tell whether collecting New York State taxes will hamper demand.
• Bezos also talked about consumer confidence and noted that offers like Amazon Prime are in demand as folks want to drive less. Bezos also noted that faster delivery time are making Amazon more of a competitor with local stores. Given the choice between driving 10 miles and clicking consumers could be opting for the e-commerce route, said Bezos. “It’s our job to insulate customers. The burden is on us to offer these services in a way that’s economical for us,” said Bezos.

For the year, Amazon is projecting revenue of $19.35 billion and $20.1 billion, up 30 percent to 35 percent. Operating income was expected to be between $745 million and $920 million. Both of those ranges are higher than Amazon’s first quarter outlook for the year.

In a statement, Amazon credited Amazon Prime membership gains and free shipping for helping the company buck tough economic headwinds.

By the numbers:

• Amazon spent $272 million on fixed assets including internal software and Website development in the quarter, up 40 percent from a year ago.
• Second quarter inventory was $1.1 billion, up from $1.07 billion in the first quarter. Inventory turns in the quarter was flat from the previous quarter at 13.
• Accounts payable days–how long a company takes to pay its trade creditors–was 58 in the second quarter, up from 53 the prior quarter. The figure has fluctuated between 53 and 62 over last four quarters.
• North American sales in the second quarter were $2.17 billion with international revenue of $1.89 billion compared to $1.6 billion and $1.28 billion, respectively.
• International operating income was $149 million with North American operating income of $96 million. North American sales growth was up 35 percent from a year ago and international sales were up 47 percent.
• Media sales were $2.4 billion, up 31 percent from the year ago quarter, with electronics and general merchandise coming in with revenue of $1.5 billion, up 58 percent.
• Amazon ended the quarter with 18,400 employees.
• “Other” revenue, which includes Amazon Web Services, was $126 million, up 38 percent from a year ago. In the first quarter, Amazon reported “other” revenue of $111 million.

 

Comments

[AmesTiedeman]

AMZN is the best E-Commerce company in the world.

[NetworkEffect]

Amazon, as the retailer, is in a tough business, but Amazon as the Service Provider to other retailers, leveraging their economies of scale and expertise in all areas of operations is the potential big win here. remains to be seen whether Amazon can pull this off, but if they can, it's a big one.

[fatcat]

Good article and good company(amzn),but I wonder,how does this square with what Fedex and Ups are saying about delivery volume being way down?

[zodlidd]

Amazon MISSED by $0.02, here's how:

The $53M NON CASH operating gain, which caused the non-recurring income resulting in the lowered tax rate, didn't exist (and should be, as well as any affects it may cause, stripped out of analyst models), then the EBIT, excluding FX effect, of $147M would have been taxed, as forecast by analysts, at a 30% rate, resulting in an EPS of $0.24, which is ~$0.02 below consensus.

How can you strip out the one-time gain and not make a proforma adjustment to the tax rate, for the most "apples to apples" comparison?

Also, I agree that they raised revenue guidance - but at the expense of margins. the company's 3Q08E EBIT guidance (excluding $80M stock-based comp expense / amortization) of $195M - $240M is 25% to 2% below analyst consensus estimate of $244M.

The company's full-year EBIT estimate HAS A $175M gap, ranging from growth of 14% - 40%... Yet net sales are expected to grow between 30% and 35%..... management is baking in for a much greater probability of margin compression than expansion.

This, all coupled with the fact that the ~5-6% margin company trades at a 53X P/E multiple (compared with an industry average of ~30X) and has seen it's FCF, which was only increased 16% (compared to a "71%" EBIT increase excluding FX effects, show a sequential downwards trend and yet has its stock trade up 12% in after hours perplexes me.

Management completed dodged the question regarding the effects of the increase in oil prices on its margins. When asked about the specific impacts of the increase in oil expenses - "Could I ask two questions? First, what is the likely impact on your delivery and fulfillment charges, particularly with regard to Prime, of increased transportation costs? Is this really a 2009 phenomenon for you or is there a possible increase in delivery costs coming through the pipeline?"

Management stated "This is something that we've been dealing with for quite some time. It's part of our overall cost structure. We started in the US, some of the free shipping offers back in 2002, I believe. Oil prices were around $22 a barrel back in 2002. They've continued to grow. And certainly, it is more costly, but it's not something that's really new to us. It's part of our overall thinking as we look at our costs."

... this doesn't answer the question if the rising upward trend in shipping costs, which increased 38% quarter over quarter and increased from 2.6% of sales to 3.6% of sales (I would assume the opposite w/ the economy of scales leverage / cost savings) will continue?

Then common sense kicks in... you have a company selling products with complete elastic demand in a down market with rising fuel costs, which AMZN will continue to absorb (if sacrifice top-line growth if not), without the benefit of the tax rebates now (which presumably helped the revenue beat)...

Can someone logically explain why AMZN should trade at the levels it does?

[fxtrader07]

very good point, zodlidd.
imho it's a race going on: can bezos and co. keep the share price up long enough to cash in on most of their options and shares, or not? there are billions involved for these guys sp they will do anything to grow topline at almost any cost. once the euro reverses and the dollar regains some strength the margin and profit growth numbers will start to look very scary/toppy.
btw: RETAINED EARNINGS over AMZNs lifetime are still a negative 1 BILLION! After running the business for almost 13 years they sit on ACCUMULATED LOSSES of 1 billion - overall they haven't earned a dime yet!