Amazon margins squeezed by costs, shares plunge investors got a wake-up call on Thursday when the world’s biggest online retailer said its profit margins were sliding as it spends money on massive new distribution centers and acquisitions.

The company also reported slightly lower-than-expected sales for the fourth quarter, which includes the holiday season, as it offered discounts and free shipping to attract customers.

Amazon’s shares, which had gained 5,2% earlier in the day, lost that advance and more to fall $16,46 lower than their close in after-hours trading. They had risen more than 70% in the past six months, reaching an all-time high of $191,25 last week — leaving plenty of room for disappointment.

“I think people were expecting kind of a blowout when they looked at data points that suggested that e-commerce spending potentially had the strongest quarter in three years,” said Evercore Partners Ken Sena.

The company posted a slight dip in operating profit for the holiday fourth quarter even as revenue rose 36%, signaling the high cost of keeping competitive in the highly promotional retail environment.

Fourth-quarter operating margin declined to 3,7% from 5% a year earlier. Amazon warned that in the current quarter it could drop to between 2,8% and 3,8% — well below its 5,5% of the first quarter of 2010.

“Operating income [guidance] for the first quarter is well below the consensus and the stock is taking a big hit,” said Tim Ghriskey, chief investment officer of Solaris Asset Management. “It could be that they’re back to the spending mode.”

Amazon disclosed last year that it was spending on 13 new distribution centers, and on Thursday said that more would follow, without providing a number. The cost to bring those to full productivity would weigh on short-term margin, said chief financial officer Tom Szkutak.

“You should keep in mind that with the sheer amount of capacity that we added in 2010 … we don’t get the optimum productivity on day one,” Szkutak told analysts.

He declined to comment on just how much investment in infrastructure, talent and acquisitions the company planned to make in 2011.

“The big question for 2011 is what the growth would look like,” he said. “Stay tuned,” he said, for “how much capacity we’ll have to add to support the strong growth for the year. We’ll have to see what that looks like.”

Amazon has enjoyed headlines and rapt admiration on Wall Street over the past year for its Kindle e-reader, the top selling such unit on the market, and its double-digit growth.

That buzz has sometimes overshadowed concerns about spending and Amazon’s historic focus on driving revenue through expensive programs such as free shipping, for example, at the expense of profit margins.

Moreover, the company has been on an acquisition spree, buying companies with built-in subscriber bases from to LOVEFilm, a UK-based DVD-by-mail and streaming video provider that operates in Europe.

“When you look at the size of the opportunity, and how relatively under-penetrated e-commerce still is, and the opportunity ahead of Amazon to basically gain share, they’re making the right decisions,” said Sena.

Goodbye paperbacks
Amazon expects first-quarter operating profit between $260-million and $385-million, including $140-million for stock-based compensation and asset amortization.

Excluding amortization, the forecast is $400-million to $525-million. Evercore’s Sena said analysts expected $580-million.

It expects revenue between $9,1-billion and $9,9-billion for the first quarter. Wall Street expects revenue of $9,31-billion, according to Thomson Reuters.

Amazon, which began as a Web bookseller and is now at the forefront of digital publishing, said Kindle books have now overtaken paperbacks as its most popular format. It said last summer it was selling more digital books than hardcovers.

Over 83% of books available in the US Kindle store are $9,99 or less, Amazon said. It has tried to keep prices low to encourage adoption.

Although Amazon does not disclose sales or profit data for its Kindle e-reader or content, many believe it derives more profit from digital books than from its Kindle devices and say that content is a better bet for its long-term growth.

For the company’s fourth-quarter, revenue of $12,95-billion fell just short of the average estimate of $13,01-billion. Some bullish analysts expected Amazon to blow past those numbers.

Net income in the fourth quarter was $416-million, or 91 cents per share — up from $384-million, or 85 cents per share, a year earlier. Analysts on average forecast 88 cents a share.

Amazon shares traded at $167,99, down 9%, following the earnings report, after rising more than 5% to end at $184,45 on the Nasdaq on Thursday. – Reuters

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Alexandria Sage
Alexandria Sage works from San Francisco, CA. Reuters journalist covering cars and tech in San Francisco Alexandria Sage has over 894 followers on Twitter.

Related stories

Argentinian revenge fantasy a hit at Cannes film festival

Director Damian Szifron's film "Relatos Salvajes" drew hoots and applause from critics in contrast to the tepid reaction to the Saint Laurent biopic.

Carlos the Jackal receives another life prison term

A French court has sentenced Carlos the Jackal to another life prison term for bomb attacks that killed 11 people nearly three decades ago.

Paris sewers to heat schools, president’s palace

The Paris sewers -- whose murky labyrinths have been reviled and romanticised through history -- are at the centre of a renewable energy experiment.

BP starts work to install new cap on gushing well

BP removed a containment cap from its stricken Gulf of Mexico oil well on Saturday in the first step toward installing a bigger cap.

Subscribers only

Toxic power struggle hits public works

With infighting and allegations of corruption and poor planning, the department’s top management looks like a scene from ‘Survivor’

Free State branches gun for Ace

Parts of the provincial ANC will target their former premier, Magashule, and the Free State PEC in a rolling mass action campaign

More top stories

Vitamin therapy is for drips

It may be marketed by influencers, but intravenous vitamin therapy is not necessary and probably not worth the hype, experts say

Facebook, Instagram indiscriminately flag #EndSars posts as fake news

Fact-checking is appropriate but the platforms’ scattershot approach has resulted in genuine information and messages about Nigerians’ protest against police brutality being silenced

Murder of anti-mining activist emboldens KZN community

Mam’Ntshangase was described as a fierce critic of mining and ambassador for land rights.

Unite with Nigeria’s ‘Speak Up’ generation protesting against police brutality

Photos of citizens draped in the bloodied flag have spread around the world in the month the country should be celebrating 60 years of independence

press releases

Loading latest Press Releases…

The best local and international journalism

handpicked and in your inbox every weekday