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Amazon’s huge profit drop

Amazon has reported a jump in retail sales but its profits took a big hit as the e-commerce giant continues investing in a number of costly areas, including video, fulfilment centers and international expansion within fast-growing economies such as India.

The world’s largest online retailer has reported a 77 per cent slump in quarterly income and forecast a potential operating loss in the current quarter, $US300 million ($A376 million) to a loss of $400 million.

The company posted second-quarter revenue of $38 billion, up 25 per cent from the previous corresponding period.

Operating cash flow increased 37 per cent to $17.9 billion for the trailing twelve months, compared with $13.0 billion for the trailing twelve months ending June 30, 2016. Free cash flow increased to $9.7 billion for the trailing twelve months, compared with $7.7 billion for the trailing twelve months ended June 30, 2016.

Operating income decreased 51 per cent to $628 million in the second quarter, compared with the operating income of $1.3 billion in second quarter 2016.

“Our teams remain heads-down and focused on customers,” said Jeff Bezos, Amazon founder and CEO.

“It’s energising to invent on behalf of customers, and we continue to see many high-quality opportunities to invest.”

According to Neil Saunders, managing director of GlobalData Retail, Amazon’s breakneck growth stood in contrast to the fate of many brick-and-mortar rivals, who have struggled to find their footing as more people shop online.

“While many other retailers are bumping along the bottom in terms of growth, Amazon increased its sales line by almost a quarter,” Saunders said. “In real terms, this means the online behemoth took some $7.5 billion more in revenue this quarter than during the same period last year. By any standards, this is an impressive performance – but it is doubly so for a company of the size and scale of Amazon.”

“Worryingly for other retailers, Amazon shows no signs of slowing down.”

Saunders said Amazon’s growth this quarter was sequentially better than last. Even in a mature market like North America, Amazon still managed to grow its sales line by 26.6 per cent.

“And all of this comes before the sales benefits of Whole Foods, which will boost future growth rates by around 12 percentage points. All in all, it is clear that Amazon is not only increasing its dominance but is doing so at an ever-faster pace,” he said.

Saunders said, however, that as good as Amazon is at generating sales, it is far less successful in turning those sales into profits.

“To be fair, much of this is deliberate: Amazon chooses to reinvest in its business and to sacrifice profits to boost its market share and dominance,” he said. “However, such a strategy shows up in a weak set of bottom line numbers. Indeed, in its latest quarter, Walmart made more net profit in a week than Amazon did during the entire three-month period.”

“As we predicted in our last note, Amazon’s profitability is getting worse rather than better,” Saunders said. “However, it all adds up to one thing: Amazon is buying sales at the expense of the bottom line.”

He said in their view, this is a sustainable position both because Amazon is cash generative and is not losing money; nevertheless, it takes some of the shine off Amazon’s success.

“The unfortunate truth for other retailers is that Amazon’s growth and success will force them to reduce margins, especially if they want to grow in e-commerce,” he said. “And While Amazon is comfortable operating with relatively low profitability, many other retailers – and their investors – are not. This is something that will create some significant pain points over the coming years.”

Bezos’ wealth skyrockets

Bezos also briefly became the world’s richest man in Forbes magazine’s tracking of wealth, as stock in his e-commerce company hit an all-time high.

Microsoft founder Bill Gates reclaimed the lead by Thursday afternoon, as Amazon’s stock fell nearly 1 per cent for the day to $US1046.

Amazon shares have been trading at a record high. They hit $US1083.31 at about noon on Thursday. According to securities filings, Bezos owns about 80 million shares, or 17 per cent; those shares were valued at more than $US87 billion ($A109 billion) at the peak. Bezos also owns The Washington Post through a holding company.

Forbes said Bezos’ net worth was about $US90.6 billion when the market opened on Thursday. Gates had $US90.1 billion. Forbes said Gates would have been the undisputed leader had he not given billions of dollars away to various philanthropic causes. Bezos issued a request for philanthropic ideas in a tweet in June, just before Amazon announced a $US13.7 billion deal for organic grocer Whole Foods.

This story first appeared on our sister site, Inside Retail Australia.

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