Amazon’s Investments Weighs on Earnings

Despite net sales increasing 31% to $32.7 billion in the third quarter and operating income up 41.6% to $575 million, there was a sense of disappointment from many folks as Amazon missed earnings per shares expectations of 78 cents, coming in at 52 cents instead.

Looking at fulfillment and shipping costs for the quarter, fulfillment costs increased 43.9% compared to third quarter 2015 while shipping costs and shipping revenues jumped 43.3% and 43.9% respectively for the same period.
Regardless, Amazon has never seemed to care that much with what the financial community thinks and continues to march towards retail domination. From a logistics perspective, it was a busy quarter as the company prepared for 2017.
Eighteen fulfillment centers were added in the quarter plus five more in October. That’s a lot for any company to absorb. Most of these facilities are in North America and have been added to build capacity for its growing Fulfillment by Amazon (FBA) program.
The company is certainly acting more and more like a 3PL as it expands transportation capabilities and its FBA program. Having learned from last year when it experienced a space shortage in its facilities, Amazon noted on its earnings call that it made changes to its pricing formula for the holiday season to “incent the right behavior among sellers”. Basically, Amazon is looking to have the right products in the warehouse in the Prime space and not have the center filled with items that may not sell until after the New Year. In addition, an interesting comment was made on the call, “we’re also trying to incentivize getting inventory into the warehouse quicker”. Does this mean offering incentives to transportation partners? I’m not really sure, perhaps I’m reading too much in that sentence.
Speaking of transportation, Amazon is working with its shipping partners in the US and globally to line up capacity and share plans for the holiday season. It has added delivery capability on its own but still needs its partners such as UPS and FedEx.  UPS and FedEx have also prepared by adding additional air capacity for its customers including Amazon.  FedEx extended its agreement with Atlas Air for 747-4 aircraft for the peak season through 2021 and UPS announced it purchased 14 747-800s with plans to bring to its 747-4 aircraft for use in US domestic.
In other Amazon news, the company is focusing a lot on groceries. During the quarter it expanded its Fresh delivery service into more US locations and lowered its pricing plan. Amazon noted on the call that it is a business it is still working on costs and profitability. In a separate article from Yahoo Finance, Amazon could be looking at building 2,000 grocery stores across the US in the next 10 years. These stores would be different formats such as drive ups, neighborhood stores and such. This vision, if true, would offer additional pickup and delivery points for the company for not only groceries but other goods – an interesting thought.
Lastly, Prime Now continues to grow and is now available in 40 cities across seven countries versus 17 this time last year. Prime Now, it’s one to two hour delivery service, is another delivery option that Amazon is using to further emphasize its customer-centric services.
What’s next for Amazon? Expect its fourth quarter earnings to not only meet but to surpass expectations as it solidifies its position as among the largest global retailers.
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