Amazon's Profit Down As Spending Outpaces Sales Growth

 
Amazon.com Inc.'s (AMZN) second-quarter earnings dropped 7.7% as the Internet's No. 1 retailer by sales continued spending at a rate that outpaced even its heady revenue growth.
But the decline in profit wasn't as steep as feared, and took a back seat for investors to 51% sales growth. Shares were up 6.5%, at $228.15 after hours. The stock hit its latest high last Wednesday and had fallen 2.7% since then through the close.
"It was great revenue growth," BGC Partners analyst Colin Gillis said of Amazon's report. "That's all anyone's focusing on."
Amazon said it expects $10.3 billion to $11.1 billion in revenue in the current quarter. Analysts on average project $10.35 billion, according to a survey by Thomson Reuters. Amazon also predicted that operating income could fall as much as 93% in the third quarter.
Amazon has been investing aggressively in distribution and new technologies at the expense of the bottom line in recent quarters.
During a conference call with the media, Amazon Chief Financial Officer Tom Szkutak said the company now has 15 fulfillment centers, and "we expect it to grow [by] a few more at least" by the end of the year.
In the latest period, operating expenses climbed 54%. It was the biggest percentage increase in at least a year and came on top of a 40% increase in the year-earlier period.
The company's distribution network was the source of significant cost increases, with expenses related to fulfillment rising to $941 million from $582 million. Marketing-related expenses rose to $341 million from $211 million.
Meanwhile, Amazon's operating margin, a closely-watched metric, fell to 2% from 3.3% in the prior period.
"Their margins keep dropping," Gillis said. "Given the valuation [Amazon] is trading at, to produce such measly profits is hard to justify."
Chief Executive Jeff Bezos has defended the investment-heavy strategy, saying it will lead directly to free-cash flow. In the latest period, free-cash flow for the trailing 12 months ended June 30 fell 8% versus the year-earlier period and 3.7% from the comparable period ended March 31.
In the latest period, Amazon posted a profit of $191 million, or 41 cents a share, from $207 million, or 45 cents a share, in the same quarter a year earlier. Analysts predicted profit of 35 cents a share.
Net sales increased 51%, to $9.91 billion. The growth was 44% excluding effects from currency translation. In April, the company predicted $8.85 billion to $9.65 billion, better than analysts expected at the time.
Gross margin rose to 26.8% from 24.5%.