Same-day shipping costs drag Amazon Q3 profit down

The costs of faster deliveries have weighed on Amazon’s third-quarter profit, dragging it down 26%.

Joseph Pisani had the news for the AP:

Amazon’s push for faster delivery is hurting its profits.

The online retailer said its third-quarter net income fell 26% from a year ago, missing Wall Street expectations. Its sales outlook for the holiday shopping season also disappointed analysts, and its stock sank 7% in after-hours trading.

Amazon is moving to cut its delivery time in half to one day instead of two. To do that, it’s adding more workers in its warehouses and expanding its shipping network with more trucks, jets and package sorting facilities.

The effort is costing the company about $1.5 billion, nearly double what it previously said it would cost. But Amazon said the one-day shipping is attracting more customers and gets shoppers to spend more.

“It’s a big investment,” said Amazon CEO Jeff Bezos, in a statement. “And it’s the right long-term decision for customers.”

The Seattle-based company reported net income of $2.1 billion in the three months ending Sept. 30, down from $2.9 billion a year ago.

Earnings per share came to $4.23. That’s 36 cents less than what analysts expected, according to FactSet.

The Verge’s Nick Statt quoted a statement by Jeff Bezos:

“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,” said Amazon CEO Jeff Bezos in a statement. “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. It’s a big investment, and it’s the right long-term decision for customers. And although it’s counterintuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfillment centers very close to the customer — it simply becomes impractical to use air or long ground routes. Huge thanks to all the teams helping deliver for customers this holiday.”

The company announced earlier this year that it would start testing a shift from Prime two-day shipping to one-day shipping. That’s on top of its existing services like Prime Now, which offers same-day shipping of certain products in certain markets, and Whole Foods grocery delivery, among many others spanning food and household item delivery. The company has also been aggressively building out its contract delivery service, Amazon Flex, and even started exploring robotic ground delivery. Drones for package delivery by air are also still in the works.

Patrick McGee reported for The Financial Times that the results triggered a selloff:

Amazon’s third-quarter profits fell from a year ago as it ramped up spending on its next-day delivery service, the first time the ecommerce group has suffered an annual earnings drop in more than a year. The drop in third-quarter operating income, to $3.2bn from $3.7bn last year, triggered a sharp sell-off in after-hours trading, with shares falling as much as 9 per cent, wiping about $80bn from its stock market value. Jeff Bezos, the Seattle-based group’s chief executive, defended his decision to invest heavily in Amazon’s expanding one-day delivery service, which allows subscribers to its Prime service to receive more than 10m items in 24 hours.  “It’s a big investment, and it’s the right long-term decision for customers,” Mr Bezos said, insisting the investment was part of a “ramping up to make our 25th holiday season the best ever for Prime customers”.

But the move has some investors “running for the hills”, said Brent Thill, an analyst at Jefferies. “The key takeaway is they are shifting from harvest mode to investment mode and it’s coming at the cost of the bottom line,” he said. “That’s a different tone. Suddenly we are back to the old Amazon.” Charlie O’Shea, an analyst at Moody’s, said that while Amazon’s next-day delivery investments were “strategically necessary”, they “continued to weigh heavily on its retail profitability”.