Amazon’s Q3, Guidance Make A Bear Move, Or Crash, Plausible

28 October 2016

From Seeking Alpha:

Less than two weeks ago, I wrote an article titled Amazon – Next Stop $100 Or $1000?. This bearish article may have been a little different from the usual, as I admire what Jeff Bezos and his capable team have created. I just do not think it was or is worth anywhere near where it trades, and that includes the after-hours trading Thursday. All that did was take Amazon back to the (roughly) $760 range where it traded when Value Line reviewed it in its August 12 edition.

. . . .

The problem with AMZN is that it’s a fine company that does a lot right. But, as I argued in the article linked to above, it got caught up in a double bubble of Internet bubble 2.0 AND the ZIRP bubble which seemingly “justified” 50-100X P/E’s.

But AMZN has serious issues.

Basically, it operates in a tough business. So it passes a lot of cash through its portals but can only take a small portion of it out for itself. Otherwise, if it charged more, shoppers would just find a new tab at some competitor’s website and but from it.

That’s why its earnings need to receive maximum attention, not sales.

. . . .

The company led with cash flow, which is related to sales, but a company can have lots of cash flow and not even be profitable. Here’s the most important lines, buried a bit in the introductory part of the release:

Operating income was $575 million in the third quarter, compared with $406 million in third quarter 2015.

Net income was $252 million in the third quarter, or $0.52 per diluted share, compared with $79 million, or $0.17 per diluted share, in third quarter 2015.

Operating income barely rose. Yet stock-based compensation was estimated at $776 million for Q3. Or, more stock-based expense than operating profit. Is that fair to shareholders, or is AMZN working mostly for insiders? Note that shares outstanding, reflecting insiders cashing out on vested stock-based compensation, rose yoy from 489 to 496 million shares, or 1.4% dilution.

Despite the slow growth of operating income:

Net sales increased 29% to $32.7 billion in the third quarter, compared with $25.4 billion in third quarter 2015.

Meaning that very little of the sales gain was profit; all the rest was expense.

. . . .

Doesn’t this company care about profits at all? Also from the press release:

Fourth Quarter 2016 Guidance

  • Net sales are expected to be between $42.0 billion and $45.5 billion, or to grow between 17% and 27% compared with fourth quarter 2015. This guidance anticipates approximately 60 basis points of favorable impact from foreign exchange rates.
  • Operating income is expected to be between $0 and $1.25 billion, compared with $1.1 billion in fourth quarter 2015.

Maybe they are sandbagging things a little. But to project, in the holiday season, as little as no operating profit, is just not acceptable in this giant company. If any other company than AMZN, Tesla, or Netflix did this, the stock would absolutely crater. But not these guys.

. . . .

A key question was posed in the Q&A:

Justin Post – Bank of America Merrill Lynch

… I guess when you look at fourth quarter guidance and you back out AWS, it suggests that margins are, on the core business, are going to be pretty down versus last year. Do you view this as a abnormal investment cycle, or just part of the overall kind of ebbs and flows of the business? And then long-term, I know several years ago you talked about maybe high single digit, low double digit margins long term. I wonder if you could refresh us on that, and also just let us know if you think International has structural margin differences than the U.S. in the core retail business.

Brian T. Olsavsky –, Inc.

… As far as long-term operating margins, I can’t forecast that right now. I can’t forecast that for our AWS business either.

Yikes! As AMZN was already hot, hot, hot – but wanted the stock even hotter, the company dangled massive margin increases in front of Wall Street. Now, their casual message is to forget about that goal. Now, the goal is to pamper the customers, as Mr. Olsavsky went on to explain:

We are again working on two fronts. We are honing the businesses that we’re in and making them as efficient, as profitable as possible while also investing very pointedly and very wisely, we believe, in things that will enhance customer experience and create lasting businesses for us down the line. We’ve said we want things that customers will love, can grow to be large, will have strong financial returns and durable and can last for decades. So that’s still our mission. We have pillars of the business right now with Marketplace, AWS and Prime and we’re actively looking for a fourth and fifth pillar.

. . . .
 No dividends, no actualy interest in sustainable profit streams in the next many years. Just saying “we want [to provide] things that customers will love” is not good enough at thisstage of the game. Not when AMZN is one of the most highly valued companies in the world.

Link to the rest at Seeking Alpha

PG is anything but a savvy investor or financial expert, but the OP seems to be complaining that Amazon has gone back to doing what it has done for most of its corporate life prior to the last year or so – growing just as fast as it can.

Long-time investors have lived with the promise (and results) that Amazon can do much better things with its money by keeping the pedal to the metal than it can by paying dividends to shareholders. Those long-time Amazon investors have seen the value of their stock increase year after year after year.

Maybe that will all change, but Amazon’s latest message seems to be, “We’ve proven we can make profits for the last little bit, but we still want to grow. You can jump off with your capital gains or stay on for the ride.”

Amazon Posts Smaller-Than-Expected Profit

27 October 2016

From The Wall Street Journal: Inc. posted a smaller-than-expected increase in third-quarter profit on a sharp increase in shipping and other expenses.

Shares fell 5.9% in after-hours trading and finished down 0.5% on Thursday.

Amazon’s shipping costs rose 43% in the third quarter to $3.9 billion. The retail giant has started laying the groundwork for its own shipping business to add more delivery capacity for the holidays, with the grander ambition of one day hauling and delivering packages for itself, other retailers and consumers.

Some of Amazon’s big investments helped guide it toward its current profitability, such as its popular Echo speaker device and its highly automated warehouses and logistics network.

Amazon is also targeting new growth markets like fashion and beauty, where analysts expect quick gains due to its relatively small market share.

In all, earnings rose to $252 million, or 52 cents a share, from $79 million, or 17 cents a share, a year earlier. Analysts surveyed by Thomson Reuters expected earnings of 78 cents a share.

. . . .

Thursday’s numbers bring Amazon closer to investors’ long-held hopes of consistent profitability. The company has seesawed in and out of the black since its stock market listing nearly 20 years ago. Long after Amazon became the giant of e-commerce, it pumped revenue gains back into product development and operations.

Link to the rest at The Wall Street Journal (Link may expire) Announces Third Quarter Sales up 29% to $32.7 Billion

27 October 2016

From the Amazon Media Room:, Inc. today announced financial results for its third quarter ended September 30, 2016.

Operating cash flow increased 49% to $14.6 billion for the trailing twelve months, compared with $9.8 billion for the trailing twelve months ended September 30, 2015. Free cash flow increased to $8.6 billion for the trailing twelve months, compared with $5.4 billion for the trailing twelve months ended September 30, 2015. Free cash flow less lease principal repayments increased to $4.9 billion for the trailing twelve months, compared with $3.1 billion for the trailing twelve months ended September 30, 2015. Free cash flow less finance lease principal repayments and assets acquired under capital leases increased to $3.4 billion for the trailing twelve months, compared with $637 million for the trailing twelve months ended September 30, 2015.

Common shares outstanding plus shares underlying stock-based awards totaled 496 million on September 30, 2016, compared with 489 million one year ago.

Net sales increased 29% to $32.7 billion in the third quarter, compared with $25.4 billion in third quarter 2015. The favorable impact from year-over-year changes in foreign exchange rates throughout the quarter on net sales was $52 million.

Operating income was $575 million in the third quarter, compared with $406 million in third quarter 2015.

Net income was $252 million in the third quarter, or $0.52 per diluted share, compared with $79 million, or $0.17 per diluted share, in third quarter 2015.

“Alexa may be Amazon’s most loved invention yet — literally — with over 250,000 marriage proposals from customers and counting,” said Jeff Bezos, founder and CEO of Amazon. “And she’s just getting better. Because Alexa’s brain is in the cloud, we can easily and continuously add to her capabilities and make her more useful — wait until you see some of the surprises the team is working on now.”

. . . .

  • Amazon introduced Prime Reading, a benefit for Prime members to enjoy unlimited, free reading from a rotating selection of over a thousand books, magazines, comics, and more.
  • Amazon and Audible announced Audible Channels, a new benefit for Prime members to enjoy unlimited, free access to the new short-form digital audio service as well as access to a rotating selection from Audible’s audiobook catalog.

Link to the rest at Amazon Media Room

Internal Amazon documents reveal a vision of up to 2,000 grocery stores across the US

27 October 2016

From Business Insider:

Amazon wants to open 20 brick-and-mortar grocery stores over the next two years, and the online retailer believes the US market has room for up to 2,000 of its Amazon Fresh-branded grocery stores over the next decade, Business Insider has learned.

Amazon is planning to operate a 20-location pilot program for its grocery stores by the end of 2018, in places like Seattle, Las Vegas, New York, Miami, and the Bay Area, according to documents viewed by Business Insider.

. . . .

Physical stores are becoming increasingly central to Amazon’s business ambitions as the company expands beyond its online-retailing stronghold and looks for new ways to reach customers. Besides groceries, Amazon has already opened a few physical bookstores and is building out a network of pop-up stores in malls to showcase its line of hardware products.

Link to the rest at Business Insider and thanks to Barb for the tip.

Amazon rolls out Alexa on its Fire tablets

26 October 2016

From Cnet:

When Amazon released its new Fire HD 8 tablet last month, it promised that Alexa, the cloud-based voice service, would be added to Fire tablets in the coming weeks through a free over-the-air software update. That update is now available to owners of the 2016 Fire HD 8, as well as 2015’s entry-level Fire and Fire HD 10 and 8.

To activate Alexa, you press the on-screen home button, rather than simply saying her name, as you do with the Echo speakers. You can use voice commands to tell Alexa to play music, launch games, read audiobooks, deliver weather reports, turn on smart-home lights and more.

Link to the rest at Cnet

It took a few months for Alexa to work her way into PG’s daily routine, but she’s almost part of the family at this point. For PG, the Echo Dot is the most convenient and unobtrusive way to have her around.

Amazon’s bookstore at Washington Square: Exclusive sneak peek

24 October 2016

From The Oregonian:

The Washington Square store generating the most excitement on Saturday afternoon wasn’t the one selling Teslas, or the shop with American Girl dolls, or even the one offering diamonds. It was a bookstore.

It was Amazon’s bookstore, an admission by the nation’s largest online retailerthat brick and mortar really do matter.

The Tigard store marks the third Amazon Books store in the nation. The ecommerce giant opened a Seattle store late last year, followed by a San Diego store in September. It plans to open more stores in Chicago and Boston.

On Saturday afternoon, the Portland-area store opened for several hours, testing its new location before it opens permanently sometime this week.

The store was flooded with curious passersby, eager to get a look at Amazon’s tech-laden bookstore.

. . . .

At 7,800 square feet, the store is larger than some independent bookstores but much smaller than a typical Barnes & Noble. And with all the books face-out, the store stocks just a fraction – about 5,200 – of the books in your average bookstore.

Jennifer Nordquist, an administrative assistant from Southwest Portland who stopped in the store Saturday, said it felt a little squeezed for space, but chalked it up to first-day crowds.

Despite its limited selection of books, Nordquist said she was pleased with the titles she saw, and noticed several books that hadn’t been available at other area bookstores.

The immediate area has been without a bookstore since 2012, when Barnes & Noble closed its store near the mall and moved to Bridgeport Village.

“It’s nice having a bookstore nearby,” Nordquist said.

. . . .

“Our goal is not to find bestsellers,” Cast said. “Our goal is to find books that customers will love.”

And while Amazon’s bookstores might not seem as cozy as others with live-in cats, well-worn armchairs and hand-written staff recommendations, Cast says the stores are driven by data from passionate book-lovers.

Instead of a hand-written card under a few books per shelf, every single book in Amazon’s store features a placard with a customer review or a notable award the book received.

And the store offers other navigational tools to help browsing customers: There’s a table dedicated to books with an average rating of 4.8 stars and above and an end-cap featuring book club picks by Amazon’s Goodreads network. There’s a shelf dedicated to books with local connections, and scattered throughout the store are Netflix-style recommendations: If you liked this title, you’ll love these, a sign promises.

Link to the rest at The Oregonian

A2IM Warns of Counterfeit CDs Across

24 October 2016

From Billboard:

Attention music shoppers: Some of those random sellers atop the price search listings on Amazon — you know, the ones offering CDs for a few cents less than Amazon while still boasting the “Fulfillment By Amazon” (FBA) button — may be too good to be true. Independent music trade organization A2IM issued a warning on Tuesday (Oct. 18) alleging a possible rash of counterfeiting across the mega-retailer, with rights holders and labels getting the shaft.

A2IM said it believes illicit copies of relatively new albums are being manufactured in China and are so close to the original that “even the legitimate manufacturer cannot tell without very close examination.” Counterfeiters are pricing the albums slightly below Amazon’s official versions in order to surface their bogus copies right above the genuine article.

Link to the rest at Billboard

Amazon sets story of American Girl doll in 1963 Detroit

23 October 2016

From USA Today:

In 1963 Detroit, a 10-year-old girl named Melody is facing the realities of being black in  America. She sees schools in her neighborhood that don’t have enough books for every student. She hears a white boy tell her to go back to Africa. When she goes to a department store, she is accused of shoplifting just for taking a dress off of a rack to look at it.

This is real, bracing history told in a family-friendly way through a TV special inspired by a doll.

An American Girl Story — Melody 1963: Love Has to Win, debuted Friday on Amazon Prime. It stars Marsai Martin (who plays Diane Johnson on ABC’s Black-ish) as an inquisitive, creative child who finds a way to confront the racism of her world.

“Fear brings out the worst in us, but love brings out the best,” says Melody’s mother (Idara Victor of AMC’s TURN: Washington’s Spies), summarizing the uplifting message of the special’s narrative.

. . . .

The Melody character was developed with much care for historical accuracy by the American Girl company, which consulted with an advisory board of historical experts, civil rights figures and others. The story for the Melody doll was inspired in part by the childhood of one of those advisers, former Detroit City Council member JoAnn Watson.

Link to the rest at USA Today

What Barnes & Noble Doesn’t Get About Bookstores

23 October 2016

From The New Yorker:

April, Leonard Riggio announced that he was stepping away from Barnes & Noble, the business he bought forty-five years ago and transformed into the world’s largest brick-and-mortar bookstore chain. Come September, Riggio, now seventy-five, would happily retire. Or so he claimed. Though he had ceded the title of chief executive in 2002, Riggio remained the executive chairman and the soul and supreme authority of Barnes & Noble. Still, it seemed like a safe time to step down. Pummelled in recent years by Amazon’s dominance over the industry, and the hangover of the recession, Barnes & Noble had closed more than ten per cent of its stores and fended off hostile takeovers, but it was still alive. Its losses had levelled off, and sales were actually growing in many categories, including board games, vinyl records, and even some categories of books, the non-digital kind (like coloring books for grownups). In March, the company announced plans to open its first new stores in several years, and in June it unveiled its potential future: smaller locations, with full-service bars and restaurants, and a more boutique feel. It seemed to be a move away from the model of “superstores” that the company once defined itself by.

But then, in August, Riggio and the board he leads ousted Ron Boire, who had lasted less than a year as chief executive, and was the third C.E.O. to pass through Barnes & Noble since 2010.* A few weeks later, quarterly financial results presented shareholders with the cold reality of Barnes & Noble’s troubles. Losses were mounting across the board—particularly for the Nook, the company’s troubled wireless reading device—and sales were falling more quickly than expected. The company’s stock was almost a quarter of what it had been a decade ago. In response, Riggio has returned to the chief executive’s chair, ostensibly until a suitable replacement is found.

The key question for Riggio now is figuring out what purpose Barnes & Noble serves today. Amazon dominates the industry with low prices and a vast selection, and is even flirting with brick-and-mortar bookstores, having opened two in the past year. Independent bookstores—once assumed to be on their way to extinction—own the romantic notion of a bookstore as a place, like a church or a social club, where communities are nurtured. Barnes & Noble is stuck in the middle, a giant saddled with hundreds of huge stores, and an image of corporate sameness in a market that has increasingly come to treasure defiantly independent bookstores.

. . . .

 Riggio believes that the same type of person shops at small independent bookstores, Amazon, and Barnes & Noble. “The No. 1 consideration of where someone will shop is how close it is to where they are,” he said. “It has nothing to do with pedigree or branding. If there’s no bookstore close to them, they’re more likely to buy online. If there’s one close, they’re more likely to buy if it’s a block away.” His target market is the same as other book retailers: young, educated customers, and women with small children.

Link to the rest at The New Yorker and thanks to Dave for the tip.

Amazon Retail Business Is Much Larger Than Believed

22 October 2016

From Seeking Alpha:

One of the areas Amazon is vastly underestimated and misunderstood in is in regard to the total number of online business it does when measured by the number of “touches” it has on items sold.

Investors don’t price in the sales coming from third-party vendors and consider them completely different from sales generated directly from Amazon. The reason for that is sales revenue is much smaller and insignificant when measured against direct Amazon sales.

This is important to understand because it removes as much as half, or possibly even more, of the online business that is done via Amazon, which will eventually have tremendous consequences for its competitors.

. . . .

Retail sales in the U.S. come in at about $5 trillion, with about 8 percent of that being online sales, according to the Department of Commerce and Amazon. That puts e-commerce sales in America at about $400 billion, which would mean Amazon accounts for about 15 percent of the total.

Where the market ignores or underestimates the amount of merchandise handled by Amazon is in regard to third-party sales volume. When taking that into account, the amount of sales handled by Amazon climbs as high as 36 percent, according to sales data ChannelAdvisor, cited by MSN. It said, “When you ‘unpack’ the $63.7 billion revenue, that has transactional value (what Wall St. calls Gross Merchandise Value) of $135 billion ($56 billion direct from Amazon and $79 billion from third party sellers) which is 36% of overall commerce.”

. . . .

A number of others see it being closer to about 30 percent of the total, which represents more of a consensus. Either way, there’s a lot more merchandise being handled by Amazon than represented by sales numbers.

Since Amazon doesn’t release its gross merchandise volume, we have no way of knowing the overall total sales coming from the various ways they are handled when including third-party sellers.

Amazon gets a commission for these sales, and they can be in a range of 5 percent to 30 percent. Those following the company closely say the average probably is closer to 10 percent. If that’s accurate, it would mean as much as 90 percent of third-party sales aren’t reflected in overall Amazon sales. The sales are still there, but they aren’t part of the top and bottom lines of the company.

. . . .

Investors in retail companies may be thinking those companies have a much more solid e-commerce business than understood when measured against the direct sales by Amazon, but not including the totality of touches or handling Amazon accounts for altogether.

Everything Amazon has a hand in is something its competitors don’t. So while Amazon doesn’t count the revenue from its third-party vendors, it does result in its competitors not getting those sales.

While at this time we don’t have a clue as to what the gross merchandise volume of Amazon is, it must be included in the analysis of the overall retail sector as it relates to online sales volume that those outside of Amazon aren’t getting.

If Amazon is handling a product, its competitors aren’t handling it or generating sales. The probability that Amazon’s gross merchandise volume is going to continue to grow is very high, which means trouble for all of its competitors. Those holding positions in retailers must start to price this into the future prospects of each company.

. . . .

I have no doubt Amazon will eventually become the largest retailer on planet earth. It’ll take time because a lot of people that shopped in a certain way before Amazon arrived on the scene, for the most part, continue to do so now. As that gradually changes over time, Amazon will be there waiting for them to use them as their retailer of choice.

. . . .

Another major part of the timing of this will be how consumers respond as the global economy continues to slow down and the next recession hits. During the Great Recession, consumers, including consumers with more disposal income, flocked back to Wal-Mart to get low-price products. The question in the next recession will be if that is going to be the practice, or if consumers will instead gravitate more toward Amazon. My thought is consumers will give Amazon a boost during this time, and it will accelerate its move toward being the largest retailer.

Link to the rest at Seeking Alpha

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