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Amazon’s Costs to Offer One-Day Prime Shipping Cut Into Q2 Profit

Amazon is a major player in the streaming-video wars, but its Q2 results show where its priorities lie: getting people to buy more stuff and delivering that faster.

The e-commerce giant missed its profit target for the second quarter of 2019, with higher-than-expected costs for the company’s move to offer one-day shipping through its Prime program.

In the earnings release, Amazon founder/CEO Jeff Bezos said the introduction of Prime one-day delivery — available for more than 10 million products — has produced “accelerating sales growth.”

CFO Brian Olsavsky, on the Q2 earnings call, said Amazon’s costs for one-day Prime shipping in the quarter were slightly higher than the $800 million the company previously expected. That was related to transition costs for Amazon warehouses and additional costs for managing inventory. He said there would be a “cost penalty” in Q3 for the ongoing investment in one-day shipping which was factored into its guidance.

“We’re in the middle of a journey,” as Amazon continues to expand one-day delivery in North America as well as in other markets, Olsavsky said. “It does create a shock to the system. We are working through that… we’ll regain cost efficiency over time.”

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On the call, Olsavsky said there was a significant step up in one-day shipments in North America in the second quarter; he didn’t provide numbers but said volume in Q3 for one-day shipping is projected to be even higher. Operating income for the North America segment dropped 15% in Q2, to $1.56 billion.

For the second quarter of 2019, Amazon topped sales estimates but fell short on the bottom line. The company reported revenue of $63.4 billion, up 20% year over year, and net income of $2.6 billion ($5.22 per diluted share), a 3.6% increase from the year-earlier period. Analysts had expected revenue of $62.48 billion and EPS of $5.57.

Amazon forecast Q3 net sales of between $66 billion and $70 billion, with operating income of $2.1 billion to $3.1 billion (down from $3.7 billion in third quarter 2018). Olsavsky said one-day shipping will be the biggest factor for higher costs in Q3 but he also cited higher marketing spending. In Q2, Amazon reported marketing spending of $4.29 billion, up 48% year over year.

Amazon touted the results of this year’s Prime Day, which actually spanned two days (July 15-16), and Olsavsky said “it was a good test” for the one-day shipping program. Without providing specifics (as is par for the course for Amazon) the company said Prime Day sales surpassed the previous Black Friday and Cyber Monday take combined and claimed that it signed up more new Prime members on July 15 than any previous day and almost as many on July 16.

Amazon’s AWS cloud-computing unit turned in $8.38 billion in sales, up 37%, slowing slightly from 40%+ growth in the past five quarters. The company’s “Other” category, which primarily comprises ad sales, grew 37% to hit $3.0 billion.

Amazon also boasted about its tally of 47 Emmy Awards nominations for original shows, more than twice as many as it received in 2018, including 20 nominations for “The Marvelous Mrs. Maisel” and 11 for “Fleabag.”

This week, the Justice Department announced a broad antitrust investigation into large online platforms, including in retail — indicating Amazon is one of the targets. The DOJ probe wasn’t discussed on the Q2 call.

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