Net sales grew by 27% to $13.81 billion in the third quarter, compared with $10.88 billion in the same quarter of the previous year. Excluding the $348 million unfavorable impact from year-over-year changes in foreign exchange rates over the quarter, net sales grew 30% compared with the third quarter of 2011. The operating loss was $28 million compared with operating income of $79 million in third quarter 2011.
The unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter on the operating loss was $3 million. The net loss was $274 million in the quarter, or $0.60 per diluted share, compared with net income of $63 million, or $0.14 per diluted share, in year on year. The third quarter 2012 includes a loss of $169 million, or $0.37 per diluted share, related to the equity-method share of the losses reported by LivingSocial, which can be primarily attributed to impairment charge on certain assets, including goodwill.
North America segment sales, representing amounts earned from retail sales of consumer products (including from sellers) and subscriptions through North America-focused websites, and including amounts earned from Amazon Web Services (AWS), were $7.88 billion, up 33% from third quarter 2011. International segment sales, representing amounts earned from retail sales of consumer products (including from sellers) and subscriptions through internationally-focused websites, were $5.92 billion, up 20% from third quarter 2011. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates, sales grew 27%.
Worldwide Media sales grew 11% to $4.60 billion. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates, sales grew 14%. Worldwide Electronics and Other General Merchandise sales grew 36% to $8.56 billion. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates, sales were up 39%. Net sales for the fourth quarter are expected to be between $20.25 billion and $22.75 billion and to grow between 16% and 31% compared with fourth quarter 2011. Operating income (loss) is expected to be between $(490) million and $310 million, compared with $260 million in the same quarter of the previous year.
Operating cash flow increased by 8% to $3.37 billion for the trailing twelve months, compared with $3.11 billion for the trailing twelve months ended September 30, 2011. Free cash flow was reduced by 31% to $1.06 billion for the trailing twelve months, compared to $1.53 billion for the trailing twelve months ended September 30, 2011.
The $299 Kindle Fire HD 8.9" will start to ship on November 20, 2012. Compared with the iPad mini, the company says that Kindle Fire HD 8.9" has 193% more pixels (2,304,000 pixels vs. 786,432 pixels) and 56% more pixels-per-inch (254 vs. 163). You can watch HD movies and TV, which you cannot on the iPad mini and you also get better audio with dual stereo speakers and Dolby Digital Plus. Amazon has introduced the fifth-generation Kindle e-readers. Kindle Paperwhite is the most advanced e-reader ever constructed with 62% more pixels and 25% increased contrast, a patented built-in front light for reading in all lighting conditions, up to 8 weeks of battery life, and a thin and light design for just $119.Amazon launched the Japanese Kindle Store, offering a large selection of over 50,000 Japanese-language Kindle books. In all, the store offers over one million titles, including the largest selection of bestsellers in English and other languages.
Amazon has no real challengers to its dominance in the online retailing business because it has been able to use technology to create a unique niche for itself in the discount retail marketplace. Other discount retailers such as Wal-Mart (WMT), Sears (SHLD) and Target (TGT) have been losing market share to Amazon as a result of its rapid expansion and a recent survey revealed that as of today, about 50% of Wal-Mart's customers have also shopped at Amazon. In addition to its huge head start, Amazon also has a competitive advantage because it does not have the costs of brick and mortar distribution and most of its customers do not have to pay taxes.
However, the competitive advantage of not having to levy sales taxes may be disappearing. Despite a Supreme Court ruling that mail order merchants do not have to collect taxes in states where they are not physically present, states have been aggressive and New York has passed a law compelling the company to collect taxes. This is being challenged in court but the company is beginning to collect taxes in California, Texas, Pennsylvania, and other states. As a result, it has begun a hectic programme of constructing distribution centers across the country. New warehouses are being built in Patterson, Calif., and on the outskirts of Los Angeles. Others are under way in Indiana, New Jersey, South Carolina, Tennessee, and Virginia. The company is hoping that these new distribution centers will enable it to cut down on shipping times and provide better customer service.
What is most worrying is that Amazon has not yet started to see returns on its huge investments and those margins are being compressed severely. Despite the decrease in fulfillment costs, the company has shown its first operating loss in 14 quarters and the outlook for the fourth quarter is equally grim. I personally believe that Amazon stock is highly overpriced at the moment and I would have to see more evidence of stable and concrete operating profits before I would even recommend looking at the stock as an investment. After all, one of the best stocks in the market, Apple (AAPL), is available at a multiple of 10 times earnings, so why on earth would you consider Amazon at a multiple of over 100 times?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.