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updated: 7/26/2013 7:18 AM

Amazon reports surprise loss on warehouses, content spending

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  • Inc. reported a surprise net loss as the world's largest online retailer continued to pump money into warehouses and digital content, fueling sales growth at the expense of profits. Inc. reported a surprise net loss as the world's largest online retailer continued to pump money into warehouses and digital content, fueling sales growth at the expense of profits.

Bloomberg News Inc. reported a surprise net loss as the world's largest online retailer continued to pump money into warehouses and digital content, fueling sales growth at the expense of profits.

The second-quarter net loss was $7 million, or 2 cents a share, compared with profit of $7 million, or 1 cent, a year earlier, the Seattle-based company said in a statement yesterday. Analysts had projected net income of $28.8 million on average, or 6 cents, according to data compiled by Bloomberg.

Chief Executive Officer Jeff Bezos is betting that near- term investments on cloud computing and a massive delivery infrastructure that lets the company send packages anywhere in the country in two days will provide cash flow down the line. Operating expenses rose 23 percent in the latest quarter, as Amazon built out its digital media business, which delivers books, music and shows to its Kindle handheld devices.

"The clock is ticking for Amazon to show that it can sell its goods and services while making a profit that might start to justify its market capitalization," said Colin Gillis, an analyst at BGC Partners LP in New York who rates the shares hold.

Revenue rose 22 percent to $15.7 billion from $12.8 billion, matching analysts' average estimate. The sales are adding to a U.S. e-commerce market projected to increase to $370 billion in 2017.

Amazon fell as much as 5.7 percent in extended trading. The shares advanced 1.5 percent to $303.40 at yesterday's close in New York, leaving them up 21 percent this year, compared with a 19 percent gain in the Standard & Poor's 500 Index. In German trading today, shares slid to the equivalent of $295.77 at 11:04 a.m. in Frankfurt.

Prime Customers

Revenue in the current quarter will be $15.5 billion to $17.2 billion, Amazon said, compared with analysts' estimate for $17 billion on average.

Amazon, which began as an online seller of physical books in 1995, now sells everything from apples to treadmills to millions of customers. It's also used its Prime membership service to boost loyalty. Members of the program, which ships packages in two days, spend three to four times more than non- members, according to Colin Sebastian, an analyst at Robert Baird & Co. in San Francisco who rates the stock the equivalent of a buy.

The company is seeing more Prime members signing on to access TV shows and movies, Tom Szkutak, Amazon's chief financial officer, said in a conference call. Spending on technology and content increased 47 percent, the most of any category, primarily from investments in Amazon Web Services, the company's cloud-computing business, and video content, he said.

Digital Content

Sales of digital products are increasing faster than physical items, Szkutak said. Amazon is already making investments for the fourth-quarter holiday shopping season and "revving up video content," he said.

The company has spent money on getting warehouses closer to customers, something that should reduce shipping costs over time. Shipping as a percentage of revenue was 4.6 percent, the same as the previous year, showing the effort isn't yet at a scale that is adding to profit. Fulfillment expenses increased 36 percent.

"We're investing very heavily into the business," Szkutak said on yesterday's call. "We're continuing to add capacity. We're investing for the large opportunities we have in front of us."

Fourth Quarter

The investments mean Amazon's margins have continued to contract. Operating margin narrowed to 0.5 percent from 0.8 percent a year prior. That metric in North America, the company's most mature market, contracted to 4.3 percent in the second quarter from 4.7 percent a year earlier.

While the online retailer ended 2012 with a loss of $39 million, investors have rewarded Bezos's investment strategy with one of the highest valuations among the company's peers. Amazon is trading at 55 times next year's earnings, compared with a price-to-earnings ratio of 16 for EBay Inc., according to data compiled by Bloomberg.

Changes in foreign currency shaved about 3 percent off second-quarter sales and the third-quarter sales forecast, Szkutak said. While the euro increased 1.48 percent against the dollar in the second quarter, a benefit to Amazon, the Japanese yen declined 4.96 percent. About 13 percent of Amazon's international sales came from Japan in 2012, and in March, the company started selling its 8.9-inch Kindle Fire tablet in the country.

Sales by third parties on the site, which bring in higher margins, made up 40 percent of items sold -- the same percentage as the second quarter last year. The company takes a commission that's logged almost entirely as profit when consumers purchase from an outside seller, helping the company buffer margin contraction.

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