Prime Time for Amazon

Don't these people know the economy is in the tank? Amazon (AMZN) today reported one of its best quarters ever, with revenue growing 41% and profit quadrupling from a year ago.

Nonetheless, Wall Street punished the online retail giant after hours, partly because Amazon reported diminished gross margins. (One good reason to think that was a blip, not a trend:  Amazon sold 2.5 million copies of Harry Potter VII, which had ghastly, wafer-thin margins. What the boy wizard giveth, he take awayeth.) The news out of Seattle was pretty good today, and Amazon is predicting, in the words of CFO Tom Szkutak, "our best holiday season ever."  With consumers in a dither about the housing meltdown in general and Chinese toys in particular, how is this possible?

Company executives yesterday say that Amazon is firing on all cylinders. Szkutak said that Amazon has more stock in stock, and lower prices, than at any time in the company's history. He also added one more factor, which ought to confound the critics: Amazon Prime, the company's membership program that, for a $79 annually, guarantees free two-day delivery on anything you buy. The critics had said it would never work. But it is working—Szkutak said that enrollment doubled year over year. It was recently rolled out in Japan where the uptake is just as healthy. And it will only become more efficient.

As founder and CEO Jeff Bezos claimed during an analysts' call today, for Prime, "the opportunity on the cost side is a very large one when we have sufficient scale." The bigger it gets, the cheaper it is. Huh? Bezos: "The opportunity is to modify the fulfillment center network so its optimized for faster delivery. As you can imagine, a fulfillment center optimized for two-day delivery looks very different from one optimized for standard delivery."

I can't imagine that, exactly (OK, I can: A giant warehouse filled with speed freaks zipping around on rocketpacks, perhaps.)  But I believe him.

The other day, my wife was fiddling around with a new bit of software that scrapes all our credit card data and shows us the appalling ways we spend money. Our number 3 expense? Amazon. Thanks to Prime, we made 15 purchases over the past several months. Why not? Shipping is free. For the record, number one was groceries, and number 2 was the vet. My dog, Otto, has a slipped disk. No, I didn't believe it either. If only Amazon provided medical care for over-weight dogs.

Quick bit: Asked whether Amazon's new, MP3 store, which sells music at 99-cents  a download, was eating into sales of CDs, Bezos said: "We haven’t seen any evidence of that. (But) I think it’s way too early to know if you would see evidence of that."

Comments

[Louie Junior]

How can anyone fall for this "Best Holiday Season Ever" hype? Of course they'll have their best season -- they are growing at a rate of 35%. When I saw this info included in the news release heading, I knew it was spin time.

If they were growing at 1% they'd have their best Christmas ever and the stock would be trading at $11.

[Jeff Bezos]

Do you really believe their crap? Just do a simple math, the market sellers contribute 32% sale (unit), assume roughly equal to the $ value, they collect more than 20% fee (99 cents listing or $39.99 month fee, plus 15% commission, plus $1.35 closing fee), so market sellers give them nearly 200 million net fees, then how can they made ONLY 80 million profit? That's suggest all of their own sales were losing money, lose money big. BTW, the only thing they did to the market sellers was arrange the links in sellers pages (a high school student can do it in less than 10 min). Once the market sellers peaks or start to leave amazon, you will see amazon back to earth.

[Karl]

I love Amazon Prime and can believe how it is growing Amazon's revenues. I certainly spend more now on Amazon than I did prior to becoming a member.

One helpful tip - use a search engine like http://www.iprimr.com that allows you to quickly find prime-eligible items.