Amazon profit wilts under heavy reinvestment for future

As expected, Amazon.com posted a sharp drop in its second-quarter profit Thursday after reinvesting in the business.

The Internet retailer reported a razor-thin profit of $7 million, or a penny a share, down from $191 million a year ago.

Sales rose 29 percent to $12.83 billion.

Analysts had expected a per-share profit of 2 cents on $12.88 billion in sales, according to Thomson Reuters.

Thursday's results mark the sixth straight quarter in which Amazon's profit has declined on a year-over-year basis.

"It's a growth company that's investing heavily in the future," said Needham & Co. analyst Kerry Rice, who rates the stock a "hold."

"You have to be OK with that continuing for some time," he said. "As long as the company grows around 30 percent or more, then people are going to invest a lot."

Seattle-based Amazon is plowing most of its money back into things like new technology, digital content and distribution centers. It has announced plans for 18 new warehouses this year, with a third of those already completed.

Amazon reported 69,100 employees worldwide at the end of June, up from 65,600 three months earlier.

Also, profit came under pressure from Amazon's $775 million purchase of warehouse-robotics company Kiva Systems. The purchase, finalized in May, is Amazon's second largest, behind its $1.2 billion deal for Zappos.com in 2009.

Wall Street seemed to take the profit drop in stride.

Amazon's stock first fell, then rose in after-hours trading to $221.50 after the earnings report. Earlier Thursday, shares closed up $2.96, or 1.4 percent, to $220.01.

"There was nothing that made me say, 'Uh-oh, there's a problem.' It looked about like we expected," said Jason Moser, senior analyst at The Motley Fool, an equity-research and asset-management firm.

"They're spending a lot to set themselves up for long-term success," he said. "Once they're done with that, I think we'll see margins dramatically improve."

Amazon also gave a cautious outlook for the third quarter.

The company said sales likely will range from $12.9 billion to $14.3 billion, compared with analysts' estimates of $14.1 billion. It expects an operating loss of between $50 million and $350 million.

In a conference call with Amazon Chief Financial Officer Tom Szkutak, analysts repeatedly asked about the company's looming sales-tax requirements in California, Pennsylvania and other states. The concern is that Amazon will lose a price advantage over brick-and-mortar rivals, possibly cutting into sales.

Szkutak replied that Amazon already does at least half of its business in places where it collects sales tax or something similar, such as Europe's value-added tax.

"Customers are coming to us because they want value, which we offer irrespective of tax," he said. "They come because they want great convenience, obviously great service. Those are the things we focus on."

Amazon began collecting sales tax in Texas this month after reaching a deal with the state's comptroller. It will begin charging customers sales tax in Pennsylvania on Sept. 1 and California on Sept. 15.

Besides Texas, Amazon collects sales tax in Kansas, Kentucky, New York, North Dakota and Washington.

Under a decade-old U.S. Supreme Court ruling, Internet retailers don't have to collect sales tax in states where they lack a physical presence, but Congress is considering legislation that allows states to force them to do so.

Amazon, after fighting new sales-tax requirements, has been making deals in states where it operates or plans distribution centers to begin charging taxes in the future.

It consequently has proposed building 15 to 20 new distribution centers, costing at least $50 million each, Rice of Needham estimates.

Some analysts believe the buildout eventually will save Amazon money by lowering its shipping costs while speeding up the time it takes to deliver products to customers.

Szkutak reinforced that notion Thursday, telling analysts, "We're getting closer to customers," and "We have a lot of opportunity to improve that over time."

But he dismissed recent reports that Amazon is laying the groundwork for a broad rollout of same-day delivery.

"We don't see a way to do same-day on a broad scale economically," he said, adding that Amazon still will work "on behalf of customers to try to figure out a way to serve them even better by getting [them] products faster."

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

By Amy Martinez Seattle Times business reporter

By Amy Martinez
Seattle Times business reporter