Amazon's (NASDAQ:AMZN) warehouses are still giving Wall Street fits. The e-tail giant reported last week that its sales are up 22 percent in the past year, but it still lost $7 million, according to Bloomberg. Last year, with lower sales, it eked out a $7 million profit.
In fact, as its sales have risen (to $15.7 billion for the past three months), its profits have steadily dropped, according to a chart published on Friday (July 26) by Slate. Quarterly profits peaked in early 2011 at about $1.1 billion.
The result? On the day after the surprise loss, amid analyst wailing, Amazon's stock price hit an all-time high.
What both analysts and investors understand is that Amazon's ever-declining profits are because of warehouses. Amazon is building them—a lot of them—to support its delivery ambitions. And warehouses require lots of upfront spending whether the "building" is actual construction or just setting up leased space.
For Amazon (and a lot of investors, apparently) that makes sense. The distribution centers will support cheaper delivery for its usual online customers, because shipping from just outside town is cheaper than shipping from Seattle. The DCs also make same-day delivery possible, and can be set up to support operations like the AmazonFresh grocery delivery business. Amazon can even use the DCs to support its larger Marketplace customers—for a profitable fee, naturally.
But right now, Amazon is spending more than it's taking in. About one twentieth of 1 percent more, it's true, but that deficit spending from what's obviously the biggest growth story in retail drives Wall Street analysts crazy. It skews their models, makes the numbers all wrong and takes away all the convenient comparisons they depend on.
That seems to be OK with Amazon's Jeff Bezos, who doesn't appear to care a lot what analysts think, since they've misunderstood Amazon's business model for more than a decade (remember when analysts were sure Amazon was really just in it for the customer data, which it would then sell to other retailers?).
It should probably be a lot less OK with brick-and-mortar retailers who face a real threat from Amazon's capital investments. As long as Amazon is still in investment mode, chains have a little breathing room. But when Amazon stops building out, the real battle over retail business models will begin.
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