Q2 Red Ink At Amazon Stirs Doubt On Growth

Investor's Business Daily

Amazon (AMZN) fell late Thursday after the e-commerce giant unexpectedly reported a second-quarter loss as it continues to spend heavily on fulfillment centers and digital content. Sales and Q3 guidance also fell short of views.

Amazon lost 2 cents a share in Q2 vs. a 1-cent profit a year earlier. The consensus estimate was for a 5-cent gain, according to 43 analysts polled by Thomson Reuters. The profit excludes one-time costs but includes stock-based compensation.

Revenue surged 22% to $15.7 billion, as strength at home masked weakness abroad. Analysts had expected $15.73 billion. The 22% jump was steady with gains in Q1 and Q4 2012, showing that Amazon's growth isn't accelerating, after decelerating in the five prior quarters.

Amazon shares fell as much as 5% in late trading, but pared that to about 2%.

"The significance of Amazon's Q2 loss is that it shows that competition in online retailing is increasing," said Gartner analyst Gene Alvarez.

"There's concern about Amazon's top and bottom lines," said S&P Capital IQ equity analyst Michael Souers, noting that softness in Europe and slower industrywide online sales growth in the U.S. vs. a year ago are undercutting Amazon, which continues to spend heavily on fulfillment centers and other projects to drive revenue growth.

"We are adding (fulfillment) capacity and that's reflected in the guidance you see in Q3," Amazon CFO Tom Szutak said in a conference call with analysts after the results were issued.

Operating income fell 26% to $79 million from $107 million in the second quarter of 2012.

Costs Still Rising Fast

Amazon's cost of sales, including what it spends to support Kindle e-readers and free shipping services, rose 18.1% in Q2. Total operating expenses, including what it spent on fulfillment, technology, content and marketing, surged 22.8%.

The company's operating margin, based on a trailing 12 months percent of global net sales, was 1% in Q2, unchanged from Q1. It compares with 1.1% in Q4 2012, 0.9% in Q3 and 1.2% in Q2.

North American sales surged 29.6%. But international sales rose 12.7%.

Amazon sees Q3 sales of $15.45 billion to $17.15 billion, or growth of 12%-24%. The midpoint of $16.3 billion is less than the $16.98 billion forecast by analysts. The company expects an operating loss of $65 million to $440 million vs. a gain of $28 million in Q3 2012.

Cantor Fitzgerald analyst Youssef Squali said Amazon's mixed results had some bright spots. "Most impressive was gross margin, which was up 255 basis points year-on-year," he wrote in a post-earnings note. He said the light EPS seems to be due to higher technology and content cost.

JPMorgan analyst Doug Anmuth said in a July 23 pre-earnings report that he believed that Amazon will continue to grab e-commerce market share and "become a more valuable company over time." But he thinks Amazon's near-term risk/reward is currently less appealing given a potential for slowing core growth in its businesses and moderating gross profit growth in 2013.

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