Amazon Rises After Sales, North American Margins Improve

Jan. 29 (Bloomberg) -- Amazon.com reported fourth-quarter sales that rose 22 percent as more shoppers turned to its broad product selection and speedy shipping for holiday gifts. Cory Johnson reports on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Amazon.com Inc. (AMZN), the world’s largest Internet retailer, surged after reporting gains in sales and North American operating margin as it benefited from investments in warehouses and a jump in holiday shopping.

Fourth-quarter sales climbed 22 percent to $21.3 billion, the Seattle-based company said yesterday in a statement. Analysts on average had projected $22.2 billion, according to data compiled by Bloomberg. Operating margin in North America widened to 5 percent from 2.9 percent a year earlier. Shares rose as much as 12 percent in extended trading.

Chief Executive Officer Jeff Bezos is pumping money into new warehouses, seeking to draw consumers away from malls with Amazon’s two-day delivery and massive selection. The company added 20 shipment hubs last year alone. The wider margins show that investment is starting to pay off, and is helping Amazon grab a bigger share of the record $42.3 billion in online holiday spending, according to ComScore Inc. (SCOR)

“If you break apart their businesses, the U.S. is more mature than some of their international markets, where they’re in the very early stages,” said Tom Forte, an analyst at Telsey Advisory Group. “I wouldn’t be surprised if investors are looking at that performance -- operating margin in North America -- as a sign that, despite the continued rate of investment by the company, there’s an opportunity for margin expansion.”

Photographer: David Paul Morris/Bloomberg

An employee loads a truck with boxes to be shipped at the Amazon.com Inc. distribution center in Phoenix. Close

An employee loads a truck with boxes to be shipped at the Amazon.com Inc. distribution center in Phoenix.

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Photographer: David Paul Morris/Bloomberg

An employee loads a truck with boxes to be shipped at the Amazon.com Inc. distribution center in Phoenix.

Margin Growth

Amazon shares climbed 4.8 percent to $272.76 at the close in New York, the biggest gain since Oct. 26. The stock jumped 45 percent in 2012.

The operating margin growth in North America was driven in part by an increase in sales on its website by third parties, which made up 39 percent of units purchased in the fourth quarter, compared with 36 percent a year earlier, Amazon Chief Financial Officer Tom Szkutak said on a conference call yesterday. Those purchases boost margins because Amazon collects a commission on any item sold by an outside vendor and books that income as 100 percent profit.

Fourth-quarter operating income rose to $405 million, the company said, compared with an average estimate of $212.1 million. Net income fell to $97 million, or 21 cents a share, from $177 million, or 38 cents, a year earlier, Amazon said.

Fulfillment Spending

Spending on fulfillment jumped 36 percent to $2.26 billion, making up the largest percentage of Amazon’s costs, the company said. Worldwide operating margin in the quarter was 1.9 percent, the sixth straight period of margins narrower than 2 percent. Operating margin, a measure of profitability, reflects operating income as a percentage of net sales.

The warehouse expansion, while expensive, is helping to bring down transportation costs, Szkutak said. Shipping costs totaled 4.5 percent of worldwide sales, compared with 5.4 percent a year earlier.

First-quarter operating income will range from a loss of $285 million to profit of $65 million, Amazon said. Sales will rise to $15 billion to $16.6 billion, compared with an average analyst estimate of $16.8 billion.

Amazon is the only company “that is able to leverage a global fulfillment network to drive disruption of traditional offline retail sales,” Scott Devitt, an analyst at Morgan Stanley, wrote in a note to clients. “The market is underestimating the long-term international sales opportunity and the cost leverage that will occur as fulfillment investments drive lower unit-variable shipping costs.”

E-Commerce Surge

The spending on fulfillment may help Amazon gain share in a worldwide e-commerce market that Devitt estimated will reach $1 trillion by 2016, up from $512 billion last year. By then, Amazon’s share will be 23.5 percent, pushing the company’s total sales to $166 billion, he projected in a Jan. 6 note.

Strengthening its shipping network helps Amazon improve service for Prime customers, who pay $79 a year for access to two-day shipping and a selection of video content at no extra cost. That group is getting larger and tends to make more purchases on Amazon than regular users, Szkutak said.

“Prime customers who are watching free content through Prime Instant Video has gone up dramatically year over year,” he said. “They’re also purchasing paid content. They watch free but they’re also paying for new content.”

The Kindle Fire HD tablet computer was Amazon’s most popular item in 2012, the company said, with its line of Kindle tablets and e-book readers holding the top four spots on Amazon’s worldwide best-seller list at year-end. In 2012, Amazon also opened Kindle Stores for Brazil, Canada, China and Japan to sell popular books, including titles in the local languages.

Bezos has said the company sells its Kindle Fire near the cost of production, aiming to make money from purchases of digital media on the device.

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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