In a sign of growing concern that Walmart and other rivals may be beginning to steal some of its thunder, Amazon’s shares slumped after hours on Thursday as investors ignored the Seattle giant’s much-better-than-expected third-quarter profit and focused instead on its slowing e-commerce growth and disappointing holiday-quarter profit and sales outlook.
That worry was evident on a conference call that
Amazon’s chief financial officer, Brian Olsavsky, sought to ease some of those concerns, saying some shortfalls relative to Wall Street’s expectations may have stemmed from a negative foreign currency translation impact, an accounting change on Prime membership subscription revenue and the timing of the Diwali festival this year in India, a key market for Amazon.
“Much of our revenue comes in the middle of November and end of December,” he said, referring to the holiday quarter outlook. “It’s always difficult (to forecast), but our warehouse is very clean. We are very bullish on the fourth quarter.”
Time will tell if Amazon can deliver this quarter. But one thing it still has in its favor despite concerns about its slowing growth rates: Amazon still commands a sizable lead over its rivals.
For instance, while Walmart’s share of the U.S. e-commerce market rose to 4.3% in 2017, from 2.9% in 2012, Amazon’s share jumped to 46%, from 24%, Euromonitor data has shown. The number of total online visits to Amazon in the year ended August was more than four times that of Walmart.com, according to Hitwise.
Here are three other key points to take away from Amazon’s results.
Amazon is increasingly acting like a grownup with regard to its costs. Once known for its prolific spending, no matter the effect on profit, Amazon actually saw its profit surge to $2.9 billion, or $5.75 a share — almost double the $3.11 a share that Wall Street was expecting — from $256 million, or 52 cents a share, a year earlier. While growth at units like its AWS cloud service remained a key profit driver, what Olsavsky described as “cost improvement” also played a central role.
Amazon’s headcount, for instance, rose 13% the first nine months of this year, compared with growth rates of at least 38% the past two years. Its fulfillment center square footage grew at about half of the rate of the prior two years, and its use of robots at fulfillment centers has offered good “returns on capital,” Olsavsky said.
Worldwide shipping costs in Q3 rose 22%, to $6.6 billion, but the pace of the increase was the smallest in at least six quarters.
“We have great cost performance across a number of areas,” Olsavsky said.
Yes, advertising will steal more of the spotlight going forward. While Amazon’s largest online retail sales unit saw sales excluding currency impact rise just 11%, the smallest gain in six quarters, its “other” unit — mostly representing its display, sponsored product and other advertising revenue — jumped 123%, more than double the growth rate a year earlier. That made it the fastest-growing segment, ahead of even the 46% growth rate of Amazon’s profit crown jewel, its AWS cloud service.
The advertising service growth at Amazon, where many consumers begin their product search these days, is only just starting. The “other” segment revenue, including advertising, totaled $2.5 billion, compared with AWS’s $6.7 billion and Amazon’s online store sales of $29 billion.
“We are seeing very strong adoption” in our advertising service from vendors, authors and third-party sellers, Olsavsky said. “We are continuing to invent on the product and tool side.”
But while it is looking to steal ad-market share from industry giants Facebook and Google, Amazon said Thursday that it doesn’t have any plans for free ad-supported Prime videos.
Is it Amazon’s turn to play catchup on brick-and-mortar? Amazon’s brick-and-mortar expansion has been closely watched, with study after study showing consumers want to shop brick-and-mortar and have the convenience of seeing and returning products at physical locations. That’s not to mention that physical stores help retailers lower costly last-mile-delivery expenses and get goods to consumers faster.
Last quarter, Amazon expanded grocery delivery at Whole Foods to 60 cities and expanded grocery pickup to 10 (although that’s still a sliver of Walmart’s number). It also added five more Amazon Go checkout-free stores last quarter, for a total of six, and opened an Amazon 4-Star store in New York’s SoHo to allow people to see and try a curated selection of products in person. Its chain of physical bookstores has expanded to 18. One common feature among many of these stores: Amazon’s Echo and Fire TV lines of devices by the Alexa smart-voice assistant.
Thanks to Amazon’s August 2017 purchase of Whole Foods, physical store sales last quarter more than tripled, to $4.2 billion. Amazon’s physical footprint also exists in other forms, including its partnership with Kohl’s to process its returns.
Amazon’s “going to experiment with multiple ways of reaching the customers wherever they may be,” Olsavsky said Thursday. “There’s going to be a lot of omnichannel overlap.”