Supply Chain

Amazon Profit Dives on One-Day Shipping Costs

“There’s a lot of cost in the short run” from expanding the free one-day delivery program, CFO Brian Olsavsky says.
Matthew HellerOctober 25, 2019

Amazon posted its first decline in profit in more than two years as its heavy investment in free one-day shipping for Prime members cut into margins.

For the third quarter, net income fell 26% to $2.1 billion, or $4.23 per share, missing analysts’ estimates of $4.62 per share. It was the first time Amazon earnings have shrunk year-over-year since June 2017.

The company spent more $800 million in each of the past two quarters to expand the free one-day delivery program to more products and regions, and said it is expecting to spend another $1.5 billion on the initiative during the fourth quarter.

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“There’s a lot of cost in the short run,” Amazon CFO Brian Olsavsky said during a conference call with journalists. He insisted the payoff would be worth it as faster shipping translates into higher sales and more loyal customers.

Indeed, third-quarter revenue rose 24% to $70 billion, ahead of estimates of $68.8 billion. But investors were disappointed as Amazon also said it was expecting fourth-quarter operating income of between $1.2 billion and $2.9 billion, compared with $3.8 billion a year ago, due to the additional delivery costs.

Amazon’s fourth-quarter revenue guidance came in between $80 billion to $86.5 billion, well below the street’s average estimate of $87.4 billion

On the news of the earnings and fourth-quarter outlook, Amazon shares fell 6.7% to $1,661 in after-hours trading Thursday. The “dismal” revenue guidance for the holiday shopping season “spook[ed] investors who were expecting a huge pay off from Amazon’s growing investments across the company,” CNBC said.

As The Washington Post reports, Amazon has in the past been able to offset significant spending with gains from its lucrative cloud-computing and advertising businesses. But “while the cloud business, Amazon Web Services, continues to be the company’s most profitable division, its growth and margins are slowing.”

AWS had $9 billion in quarterly sales, falling slightly below analyst expectations of $9.1 billion, but the 35% growth rate was the slowest since the company began disclosing that number in 2015.

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