Amazon's quarterly results foreshadow more pain for retailers

What Macy's, Kroger learned from Amazon earnings
Posted at 11:10 AM, Jul 28, 2017
and last updated 2017-07-28 11:37:28-04

CINCINNATI - Amazon Inc. reported higher revenue and lower profit margins in its North American operations in the second quarter, continuing a trend that could negatively impact brick and mortar retailers such as Macy’s Inc. and Kroger Co.

Amazon surprised Wall Street with sharply lower profits of $197 million on revenue of nearly $38 billion. The earnings miss sent Amazon shares down about 3.5 percent in Friday trades and caused other technology stocks to fall as well. Macy's stock declined 1 percent early Friday to $23.95, while Kroger was up a half percent to $24.09.

WCPO reported this week that local analysts were watching Amazon’s earnings report for signs that the Seattle-based juggernaut is continuing to sacrifice profits for market share gains against traditional retailers.

Amazon’s North American sales growth of 25 percent was higher than many analysts expected, while its North American profit margin of 2.4 percent was the lowest in at least five quarters. Both are signs that Amazon is “caring less about profitability as opposed to capturing market share for the long term,” said Joseph Edelstein, an equity analyst at Johnson Investment Counsel.

Amazon is making huge investments in warehouse and distribution centers, like the $1.5 billion cargo hub it's building in Hebron, Kentucky, a project that could boost its local employment to more than 6,000.

The company rarely delivers much detail about its operating strategies, but Chief Financial Officer Brian Olsavsky did tell analysts Thursday that cost control is now an objective for the company as it ramps up its Prime Now infrastructure to make two-hour deliveries in 50 cities and eight countries.

“That is a service that customers love,” he said. “That’s not an inexpensive service, though. So, we’re constantly working on our cost of delivery and our route densities. We like what we see and we’ll continue to expand that and we’ll be working very hard on making that not only a valuable Prime offering, a Prime benefit, but also a lower-cost operation as well.”

Investors hoping for new insight on Amazon’s approach to the grocery business came away from the call with little new information. Amazon didn’t include profit and sales projections in its future guidance because its $13.7 billion acquisition of Whole Foods Market hasn’t been completed.

But Olsavsky did reveal that the company will continue to experiment with brick and mortar formats that include no cashiers and phone-based payment systems – along with home delivery options like Amazon Fresh.

“There’ll be no one solution,” Olsavsky said. “We’re experimenting with a number of the formats from physical pickup points in Amazon Go to online ordering and delivery to your door through Prime Now and Amazon Fresh.”

Beyond those sparse disclosures, Amazon was a topic of conversation in at least five retailer earnings calls Thursday, including Starbucks Corp., Carter’s Inc. and Penske Automotive Group Inc.

“I see Amazon as an operator that can buy things and very successfully, through super logistics, get items to the customers,” Roger Penske told an analyst who asked about the Amazon threat to retail. “Now, when you start to have to assess service requirements, you have to have service shops. You have to have trained technicians and you have to have franchise agreements to do warranty. I think it's a long day before they're going to get into the service business on vehicles.”

Starbucks CEO Kevin Johnson added this observation: “The entire retail sector is going through this massive disruption and it’s clear that the winners coming out of this are going to be those companies who find elegant ways to bring an in-store experience together with a digital experience.”

Carter’s, a children’s clothing manufacturer and retailer, told analysts that at new partnership with Amazon is “off to a strong start,” expected to accelerate its 25 percent growth in e-commerce.

Carter’s launched a new brand for Amazon Prime customers called Simple Joys. It’s a multi-pack offering of infant apparel that’s targeted to young families.

“According to third-party research, our e-commerce business was the second largest contributor to the growth in online sales of young children’s apparel last year, second only to Amazon,” CEO Michael Casey said. “We (e-commerce) as a traffic driver to the stores. Some of the new omnichannel capabilities, being able to buy online and then pick up the product in the store that’s been a nice source of growth for our stores as well.”