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Amazon EPS Beats, But Sales Fall Short

Amazon (AMZN) reported much-better-than-expected first-quarter earnings late Thursday, but shares retreated 2.5% as sales fell short and heavy spending continued on fulfillment centers and other investments. The Q2 revenue outlook also was light.

The Seattle-based online seller of books, electronics and more earned 18 cents a share, down 36% from a year earlier, but 10 cents above the average estimate of 41 analysts polled by Thomson Reuters. The profit excludes one-time costs but includes stock-based compensation.

Revenue of $16.07 billion just missed analyst views of $16.144 billion. The 22% jump matched the gain in Q4 2012, showing that Amazon's sales growth isn't accelerating after decelerating in the five prior quarters.

Cantor Fitzgerald analyst Youssef Squali said results were mixed, but he was heartened by Amazon's improved margins. "Most impressive was gross margin, which was up 260 basis points year on year," Squali wrote in a post-earnings note.

Amazon's gross margin was 26.6% vs. the 25.2% consensus.

Squali noted signs that (third-party) growth continued to outstrip (first-party) sales growth in Q1. He says Amazon got further margin leverage from its AWS cloud computing business, digital products and shipping.

Operating income fell 6% to $181 million vs. $192 million in Q1 of 2012.

Not Fulfilled Yet

Amazon continued to invest heavily in Q1. Cost of sales, including spending to support Kindle e-readers and free shipping services, rose 17.7%. Total operating expenses, including what it spent on fulfillment, technology, content and marketing, surged 22.3%.

Amazon's operating margin, based on a trailing 12 months percent of worldwide net sales, fell to 1%, down slightly from 1.1% in Q4 but higher than 0.9% in Q3.

CFO Tom Szkutak said on the call that Amazon has "announced three (new) fulfillment centers in the U.S. right now and a few outside the U.S.," with more "through the course of the year." RBC Capital Markets estimates that Amazon will have 47 U.S. centers by year-end.

Amazon is trying to speed up delivery times as it loses its sales tax advantage over brick-and-mortar retailers in more and more states. It now backs a bill to require e-commerce firms to collect sales taxes for all jurisdictions. That's little problem for such a huge, tech-savvy company, but could be a nightmare for smaller online sellers.

Sales rose 26% in North America and 16% overseas.

Amazon sees Q2 sales of $14.5 billion to $16.2 billion. The midpoint of $15.35 billion is shy of analyst views for $15.897 billion. Q2 operating income is expected to range from a loss of $340 million to a gain of $10 million. It earned $107 million in Q2 2012.

"Amazon remains the behemoth in the (e-commerce) space. They are executing extremely well and continue to take market share," said S&P Capital IQ equity analyst Michael Souers.

But Souers says investors' main worry is how fast its heavy investments and sales growth can translate into margin growth. "Evaluation concerns are also a factor," Souers said.