Amazon.com beat expectations on the top line for the third quarter of 2019 but fell short on earnings per share and forecast Q4 results below Wall Street expectations — driving the e-commerce giant’s stock down 7% in after-hours trading.
In his remarks about the earnings, CEO Jeff Bezos said Amazon is gearing up to make millions more products available to Prime members for free one-day shipping during the 2019 holiday shopping season. It’s a major initiative for the company that has cut into profits: Amazon’s worldwide shipping costs for Q3 ballooned 46%, to $9.6 billion.
Amazon’s net sales increased 24% to $70.0 billion in the third quarter. Net income for the third quarter decreased 28%, to $2.1 billion, or $4.23 per diluted share. Analysts had expected Amazon to post revenue of $68.81 billion and EPS of $4.62.
For Q4 of 2019, Amazon said it expects sales to be $80 billion-$86.5 billion (11% and 20% compared with the year-earlier period), a range below an analyst consensus estimate of $87.4 billion. Operating income is expected to be between $1.2 billion-$2.9 billion — down substantially from $3.8 billion in the fourth quarter of 2018.
The forecast decline for Q4 operating profit indicates Amazon’s free one-day shipping will continue to be a drag on earnings. As Bezos acknowledged, referring to the one-day shipping initiative in prepared comments, “It’s a big investment, and it’s the right long-term decision for customers.”
“We are ramping up to make our 25th holiday season the best ever for Prime customers — with millions of products available for free one-day delivery,” Bezos said. “Customers love the transition of Prime from two days to one day — they’ve already ordered billions of items with free one-day delivery this year.”
In July, 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. He said there would be a “cost penalty” in Q3 for the ongoing investment in one-day shipping, which was factored into its guidance. In the fourth quarter, Amazon expects to spend $1.5 billion on one-day shipping, Olsavsky told analysts on the earnings call Thursday.
Bezos claimed Prime one-day shipping actually results in lower carbon emissions because those products ship to customers from fulfillment centers that are “very close to the customer,” given that it’s not practical to use air shipping or long ground routes.
The company’s Amazon Web Services (AWS) continued its growth trajectory, delivering $9.0 billion in revenue (up 35%) and operating profit of $2.26 billion (up 9%). However, AWS didn’t grow quite as quickly as analysts expected, with the segment falling short of Wall Street’s expected $9.1 billion in sales and its operating margin of 25.1% the lowest it’s been in two years.