Amazon Sales Disappoint, But Profit Growth Poses Industry Threat

Stock in Amazon was down by more than 8% early Friday after the e-commerce giant revealed sales growth in its fiscal third quarter—along with revenue projections for the current quarter—were slightly less robust than customary or expected.

Quarterly profits soared, however, presenting a mixed message at best for its retailing competitors over the longer run, one analyst said.

“Focusing on the revenue slowing and the [fourth-quarter sales] guide is missing the forest for the trees,” Wolfe Research analyst Scott Mushkin wrote in a note to clients. “In our opinion, a profit generating Amazon should terrify competitors, as it gives Amazon a significant [amount] of ammunition to acquire businesses, provides the opportunity to invest in price for its [own] products, or scariest of all, become a price-setter in food to drive share and frequency.”

For the third-quarter period ending Sept. 30, Amazon’s net sales increased 29% to $56.6 billion, falling some $540 million short of Wall Street estimates. It expected fourth-quarter sales to grow between 10% and 20%, including effects of an anticipated foreign currency impact.

At the same time, Amazon blew past earnings expectations, posting earnings per share of $5.75 vs. a consensus estimate of $3.09. Net earnings for the quarter totaled $2.9 billion, or roughly 11 times what it earned in the same period a year ago. Amazon gave a wide range of net income guidance for the current quarter, saying it would likely land between last year’s $2.1 billion figure and $3.6 billion.

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Analysts say the figures indicate investors may need to think differently about how they value Amazon, which has typically posted choppy earnings amid robust revenue growth riding the explosion of e-commerce. But Mushkin noted, however, that the prospect of an earnings-driven Amazon could result in more fuel to invest behind food pricing and physical stores, which remain relatively underdeveloped vs. grocery sellers such as Walmart and Kroger but are also growing quickly.

“I think we've started to show our strategy on the Whole Foods side,” Brian Olsavsky, Amazon’s CFO, said in a conference call with analysts. “You'll see even this quarter we started to have greater expansion of our grocery delivery out of Whole Foods using Prime Now. We’re now in 60 cities in the U.S., giving customers delivery in as fast as an hour on thousands of great organic products from Whole Foods,” along with offering pickup in 10 cities.

The company's sales in physical stores in the quarter—primarily Whole Foods Markets as well as 18 Amazon bookstores and its newly opened 4-Star unit—totaled $4.25 billion in the quarter. That was well ahead of last year’s third quarter which included only a portion of sales from Whole Foods, which it acquired during that period. Sales were slightly less than in the second quarter.

“You'll see that we've started to tie Whole Foods into Alexa. You can build your cart using Alexa and then check out using the Prime Now app,” Olsavsky said. “So there’s going to be a lot of … omnichannel overlap, especially in the grocery business.”