Amazon did not disappoint investors as net sales increased almost 34% for third quarter 2017 to $43.7 billion. Despite operating income declining 39.6%, a positive net income of $256 million was achieved. However, worth noting, third quarter 2017 net income was only 1.6% higher compared to third quarter 2016. Perhaps more concerning is that net income is down 24.5% when compared to the first 9 months of 2017 with that of 2016 – still positive at $1.2 billion but lower than 2016’s net income of $1.6 billion for the 9 months.
AWS continues to be the shining star with third quarter net sales up 41.9% and for the nine month period, up 42.8%. However, more importantly, operating income for the recent quarter increased 36% and for the nine month period it was up 36.4%. AWS combined with Amazon’s Echo is providing the company with unprecedented amounts of customer data that the company is using to create new services and ultimately optimize supply chain operations.
The nine month period has been a busy one in terms of infrastructure investments as well as acquisitions. During the period, Amazon acquired Souq Group for about $579 million as well as Whole Foods for $13.2 billion. In addition to these two acquisitions, other acquisitions have been made for an aggregate purchase price of $126 million. According to Amazon, these acquisitions were made to “acquire technologies and know-how to enable Amazon to serve customers more effectively.”
In terms of logistics, Amazon continues to amaze. Third party seller services which includes commissions, related fulfillment and shipping fees, increased 40.2% from third quarter 2016 and now represents 18.1% of Amazon’s total net sales (Up from 17.3% in third quarter 2016). For the nine month period, ending September 30, third party seller services increased 37.5% over the same period for 2016 and represents 18.2% of total net sales compared to 16.8% for same period 2016.
Indeed, during the third quarter, Amazon announced one new fulfillment facility in the UK and at least eight new US fulfillment facilities that will open in 2018:
- Three in Ohio
- Two in Michigan
- One in New York
- One in Oregon
- One in Florida
Not surprising, fulfillment expenses remain high, up 48.1% in third quarter and up 36.8% for the nine month period. As a percentage of total cost of sales, fulfillment represented 23.3% for the recent quarter compared to 20.4% during third quarter 2016. For the nine month period, fulfillment as a percentage of total cost of sales was 22.2%, up from same period 2016’s 20.1%.
High fulfillment costs typically results in high shipping costs and Amazon is no exception. For the quarter, shipping costs which include sortation and delivery center and transportation costs, increased 38.5% to $5.4 billion. For the nine month period, shipping costs increased 37.1%. Amazon does not seem to be concerned about the high shipping costs as noted in its recent 10-Q, “We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate.”
Amazon continues by stating, “We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers and achieving better operating efficiencies – We believe that offering low prices to our customers is fundamental to our future success and one way we offer lower prices is through shipping offers.”
On its earnings call, Amazon noted that as it gets into more Amazon Logistics deliveries, it will continue to experiment with different delivery methods that makes it easier on customers. Such examples noted in third quarter and early October include:
- Its Amazon Key service allowing deliveries to be made inside the house
- Amazon Lockers in select Whole Food stores
- Amazon Business launched Business Prime Shipping, offering unlimited free two-day shipping for multi-user business customers in the U.S. and Germany.
In addition, Amazon plans to continue to invest in transportation options and build capacity to ensure that the company provides customers with “great service 12 months a year but particularly at holidays”, as noted on its earnings call. Examples cited by the company include:
- Extend cut off times for customers such as stretching cut off times from 3:00pm to midnight
- Enables Sunday delivery
- Enables better weekend delivery
Amazon continues to reap benefits from its Prime memberships. During second quarter, the company witnessed a record day for sign-ups for free Prime trials on Prime Day globally and had a very strong Prime Day in particular internationally. As a result, Prime memberships helped International net sales grow 29% during third quarter and 21% for the nine month period despite continued losses in net income.
In addition, Monthly Prime has proven beneficial for the company. As such, Prime membership will continue to be a focus for the company as it grows domestically and internationally.
Amazon expects fourth quarter net sales to be between $56.0 billion and $60.5 billion, or to grow between 28% and 38% compared with fourth quarter 2016. Operating income is expected to be between $300 million and $1.65 billion, compared with $1.3 billion in fourth quarter 2016.
We expect increasing competitive pressures will likely drive down profitability gains during fourth quarter.