Amazon's international sales growth slows

27 Jul, 2012

Amazon sales growth slowed outside the US and its profit margins shrank as it continued to invest in new warehouses to increase its delivery speeds.

Sales growth in Amazon's international business – which is predominantly European – slowed to 22 per cent year-on-year from 31 per cent in the previous quarter. Overall revenue was up 29 per cent to $12.8bn, but fell short of Wall Street expectations.

The online retailer, which provides infrastructure services to a growing number of other businesses, reported net income of just $7m, down 96 per cent from $191m last year.

While its results triggered an initial fall of 7 per cent in the company's shares in after-hours trading, they subsequently recovered and were trading up 0.7 per cent at $221.50 in the early evening in New York.

As the company aims to offer same-day delivery to more customers in big cities – a potent new challenge to brick-and-mortar stores – Tom Szkutak, chief financial officer, said it had built six of the 18 new warehouses it had announced this year.

"We're certainly ... geographically always trying to get closer to customers," he said, also noting that Amazon's operating expenses were growing at a faster rate than its revenue.

But in a likely allusion to its goals for less densely populated parts of the US and other markets, he said: "We don't see a way to do same-day delivery on a broad scale economically."

Diane Daggatt, analyst at McAdams Wright Ragen, said Amazon is already offering a same-day service called Local Express Delivery to certain cities for an additional fee of $9.99.

Its operating margin fell to 0.8 per cent from 1.5 per cent in the previous quarter. Some analysts say Amazon's profitability depends on discretionary decisions by management rather than structural issues because it can invest on so many fronts.

But Colin Gillis, analyst at BGC Partners, said slowing international sales growth showed that Amazon was not immune to the impact of the eurozone crisis and economic weakness elsewhere.

"When you start to get to scale, the tailwinds of ecommerce [growth] start to have less influence than the headwinds of a macro slowdown," he said. "Now they've got to a point where size matters."

Amazon's international presence encompasses the UK, Germany, France, Italy, Spain, Japan, China and Canada. In the past quarter in the US, Amazon's sales grew at 36 per cent, the same rate as in the previous three months.

Reflecting investment in data centres, Kindle devices and warehouses, Amazon reported diluted earnings per share of 1 cent, versus market expectations of 2 cents.

It also booked a $65m loss linked to its $775m purchase of warehouse robotics group Kiva Systems.

Despite an overall decline in profitability, Mr Szkutak said margins were getting a positive boost from Amazon's expanding cloud computing business and the growing volume of sales from third-party sellers which pay fees to use its website and warehouses.

Third-party sellers accounted for 40 per cent of Amazon's unit sales in the quarter, up one percentage point from the previous three months.

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