Amazon beats expectations in first quarter

Internet Retailing

28th Apr 2017

Amazon has beat analysts’ expectations, reporting a 23 per cent sales increase in the first quarter to US$35.7 billion, compared with US$29.1 billion for the same period last year.

Net income rose more than US$200 million from the same period last year to US$724 million in the quarter, or $1.48 per diluted share.

Amazon founder and CEO Jeff Bezos attributed the strong results to the company’s expansion to India.

“Our India team is moving fast and delivering for customers and sellers. The team has increased Prime selection by 75 per cent since launching the program nine months ago, increased fulfillment capacity for sellers by 26 per cent already this year…”

The roll out of Prime to new territories like India and Mexico, and an increase in subscriptions in existing territories, have both contributed to a 50 per cent jump in revenue from Amazon’s retail service in the quarter.

But as Neil Saunders, managing director of GlobalData Retail commented, the pace of spending growth on retail products remains much slower than it was over most of the prior fiscal year.

“Some of this is the result of a less favourable exchange rate diluting contributions from the international business.

“However, some is also down to a more challenging demand environment in North America which has limited spending uplifts on products within Amazon’s core territory.

“As Amazon splurges to forge ahead in new markets, greater profit stability in its home market arguably becomes more important.

“Even though the company’s margins remain thin, a firmer grip on fulfillment costs is currently helping to deliver this.

“That said, we believe that there are some future risks in North America – most notably from the more aggressive e-commerce push coming from Walmart and, to a lesser extent, other traditional players.

“Against this backdrop, it is essential that Amazon maximizes its potential in areas and categories where it is currently underweight.

“This includes fashion where we are encouraged by the new development of private labels such as Goodthreads and Lark & Ro.

“Although these are embryonic, they provide Amazon with the building blocks to develop a much more compelling, and slightly higher-margin, fashion proposition which will help it to grab market share profitably.

“As much as we are encouraged by Amazon’s drive into categories like fashion and home, we are more hesitant about the Amazon Fresh business.

“As much as we believe this has solid long-term potential, we think the logistical complexities and the low margin nature of grocery mean that it will be an expensive drag on profits for the foreseeable future.

“As other players become more aggressive about e-commerce, we think life will become a little tougher for Amazon.

“While we do not see any significant material damage to the firm, we do think sales and margin growth could be crimped over the medium term.

“However, we believe that in the short-term damage will be limited by the fact that Amazon has created a very successful ecosystem of content and technology; this will support Prime subscriptions which, in turn, help make Amazon the destination of choice for buying products.

“As such, while the overall outlook for Amazon is extremely positive, we maintain our view that the company’s growth and success will continue to come at the expense of the bottom line,” Saunders said.