Amazon Builds Fulfillment Centers, Investors Grouse

Amazon shares closed at US$785.14 on Monday, having failed to rebound from last week’s slide. The company’s stock had closed at $818.36 last Thursday, just before the company reported third-quarter earnings that fell surprisingly short of Wall Street estimates and warned of future revenue weakness. The share price dove $40-plus on Friday.

Amazon’s net income rose to $252 million, or 52 cents a share, in the quarter, compared with $79 million, or 17 cents in the year-ago quarter. Amazon had been expected to earn 78 cents a share based on Thomson Reuters’ survey of analyst estimates.

Operating income rose to $575 million, compared with $406 million in the year-ago quarter. Sales rose 29 percent to $32.7 billion in the quarter, compared with $25.4 billion a year-ago.

Sales were expected to range from $42 billion to $45.5 billion in the fourth quarter, or anywhere from 17 percent to 27 percent above year-ago figures, Amazon said.

Fulfillment Center Buildout

Amazon made major investments in fulfillment centers, CFO Brian Olsavsky told analysts during last week’s earnings call, adding 18 in the quarter and another five last month. Warehouse space has increased about 30 percent year-over year.

For the year, the company will have added 26 centers, compared with 14 new centers in 2015, he noted. The last time the company had a double digit increase in fulfillment centers was in 2012.

The company also is ramping up spending on video content and related marketing costs, nearly doubling year-over-year during the second half.

Amazon is making major investments in India and other overseas markets, Olsavsky said in response to a question about why international margins were so low.

“Amazon has a very real structural problem,” observed Paula Rosenblum, managing partner of RSR Research.

“I am wondering if the rise in shipping costs was driven by the ultra-high volume of Prime Day,” she told the E-Commerce Times.

Amazon must be willing to raise prices on select items, even if it means a decline in market share, as well as develop algorithms to find reasonable ways to increase costs in a way that helps to cover the cost of shipping, Rosenblum said.

Long-Term Investment

It’s likely that Amazon will be making major investments for a while, said Charlie O’Shea, a lead retail analyst at Moody’s.

“Fulfillment centers are needed to support sales growth. Content supports Prime membership velocity, and AWS will continue to expand its data centers,” he told the E-Commerce Times. “International expansion will continue to draw investment dollars as well.”

It’s difficult to predict the pace of these investments, he said, and quarterly forecasts are likely to fluctuate going forward.

Amazon expects to create 120,000 seasonal jobs in customer fulfillment and customer service during the holiday season. It transitioned more than 14,000 seasonal jobs to full-time positions last year, and it expects that figure to increase this coming season.

Cloudy Day

The quarterly performance represents just the latest example of Amazon failing to satisfy Wall Street expectations for the designated period, while it makes strategic investments in its infrastructure to satisfy long-term business goals, said Jeffrey Kaplan, managing director at ThinkStrategies.

“As AWS develops new cloud services aimed at more complicated enterprise application and computing requirements, it must provide more sophisticated solutions that also require greater sales skills and support capabilities,” he told the E-Commerce Times.

Amazon Web Services opened its Ohio region during the quarter and now operates 38 availability zones across 14 technology infrastructure regions globally. The company plans to open nine availability zones in four regions — Canada, the UK, France and a second region in China — in the coming months.

David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.

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