retail news in context, analysis with attitude

The New York Times - and pretty much every other media outlet - wrote over the weekend about how at Amazon, following a Q1 report that revenue was up 23 percent, "operating income fell 19 percent, to $146 million. Net income was a modest $108 million. Perhaps more unnerving was the company’s forecast for next quarter: flat revenue and a loss that might be as big as $455 million."

The story continues: "Shares plunged, dropping nearly 10 percent, or more than $30, to just over $300 at Friday’s close. They hit a record high of $408 earlier this year.

"This is the second quarter in a row that Amazon’s results have set off selling. Amazon shares plunged 11 percent on Jan. 31, after fourth-quarter revenue and profits were lower than analysts’ forecasts. But this time, revenue beat forecasts, suggesting that it’s the minimal profit that’s worrying investors."

For the record, it wasn't just outside investors affected by the stock price drop (which was, when you think about it, caused in part by outside investors). It was also Amazon CEO/founder Jeff Bezos. According to the Boston Globe, the plunge "cut the value of Bezos’ stake in the company by nearly $2.8 billion in just one day."

Now, we don't spend a lot of time writing about stock prices on MNB. But here's how the Times assesses Amazon's specific situation:

"Stock prices are a reflection of investors’ predictions of future profits, which is why there’s always an element of gazing into a crystal ball. The future earnings of mature companies with long track records can be forecast with considerable accuracy, but for newcomers, especially in untested technologies, it’s mostly sophisticated guesswork.

"Amazon isn’t a newcomer, but it has long had a powerful story driving expectations: the notion that it will become the global Walmart of Internet retailing. Walmart has been one of the most successful companies of all time and something of a holy grail for investors. Anyone lucky enough to have invested $1,000 in shares at the time of its 1970 initial public offering and have held them is now worth many millions.

"Walmart’s headiest growth is probably behind it, and Amazon is still expanding revenue by the 23 percent it reported this week. Still, the comparison to Walmart goes only so far. Walmart’s operating profit margin is 5.6 percent. Amazon’s is a minuscule 0.7 percent. Walmart has been consistently profitable since its earliest days, but for Amazon, bumper profits have always been just beyond the horizon."

If profits are just beyond the horizon, the Amazon landscape has become increasingly crowded. There is its traditional retail business. Its Marketplace business, which serves as a portal for other retailers. Its web services business. Its video business, which is now funding original content to attract viewers who might otherwise be using Apple's iTunes and Netflix, It is forging exclusive deals to show HBE programming. Its Amazon Fresh grocery business, which recently has introduced the Dash, a piece of equipment that enables expedited ordering, also seems to be positioning the company to start making its own deliveries in many markets, eschewing the services of FedEx and UPS. Last week, it announced Prime Pantry, which is designed to ramp up its grocery business. And this doesn't include the possibility of delivering products via drones.

The question that is being posed - and, to some degree, being answered by the investor class, at least in the short term - is whether Amazon is not paying attention to what is really important: generating profit. It always has been an act of faith that profit was less important to Bezos than creating a sustainable and dominant 21st century business model, and to a a great degree, investors were willing to make that leap with him. But now, two decades into Amazon's lifespan, investors may be losing their enthusiasm. Or, at least, their patience.
KC's View:
This is one of those stories about which I got emails even before I had a chance to comment on it.. Here's one:

Investor patience appears to be wearing thin on the issue of Amazon profitability.  It is internally as well. Some mfg’s in the S&S program are now getting asked some pretty hard questions about profitability. Amazon’s CRAP program (can’t realize a profit) signals a renewed focus on managing profit internally. It makes for interesting challenges for many in the MNB community who’s justification is to manage “fair but equal” trading programs between bricks / clicks retailers.

Whether Bezos and the Board care about stock price is another matter entirely. It’s not unfathomable to imagine that protecting stock option grants given employees might weigh heavily in the decisions needed, don’t you think?

I'm sure there are a bunch of folks out there for whom the drop in Amazon's stock price came as a rude shock last week; Bezos probably can absorb a two billion dollar loss, but not many people can say that.

Let's be clear. I don't own any Amazon stock, so I don't have any financial skin in the game.

I do think that this is something that Bezos and the Amazon board have to take seriously. Amazon's ability to expand and innovate is tied to its ability to get investor support, and if that seems to be waning, then the company will be restrained by economic realities.

It will be interesting to see if Bezos - who tends to be selective about his public appearances - makes the calculus that he needs to do some sort of public relations tour on behalf of his dream. That's probably what some within the company will be suggesting, but it will be up to Bezos to decide whether he needs to tend to his company's public image.

For a moment, let's go beyond the stock price issue. One of the remarkable things about Amazon is the degree to which it has worked to avoid legacy issues. From the corporate culture and its choice of products and services to its approach to research and development, Amazon has worked very hard to make sure it is not trapped by old or traditional ways of doing things. "It's always Day One," Bezos likes to say … though investors, for the moment, apparently don't feel the same way.

Whatever Amazon does to address the stock price and profitability issue, I think it is key for the company to make sure that it does not veer away from its fundamental value proposition - that it needs to be a nimble and aggressive 21st century retailer, making it easier for people to buy virtually anything without having to leave their homes or workplaces. There have been a bunch of stories out there lately about whether it would make sense for Amazon to acquire Sears … but to me (and I could be wrong on this), that would be such an old world approach to retailing that it would be totally out of synch with what Amazon is and wants to be. That is analyst thinking, not Amazon thinking.

Now, I do think there are things that Amazon is doing to increase profits. Raising the price of its Prime annual membership, for one. I think that in its own way, Pantry Prime may be a way to move people from Subscribe & Save to a program that could be more profitable. I suspect that there may be other initiatives in the hopper as well.

There were a few references in stories over the weekend to a possible tech bubble, that we could see a collapse in the stock prices of a wide variety of tech companies (Google and Netflix among them). I simply cannot see that happening, though there certainly could be some webs and flows. These companies are not Webvan, nor are they Sears or Kmart … they are forging new paths, often through unfamiliar territories, and I continue to believe they are taking the economy to the promised land.

Not that it's always gonna be easy.

The opening line of the Times story posed the following question:

Is a 20-year honeymoon coming to an end?

Well, y'know something?

The consumer's relationship with Amazon isn't a honeymoon. For many of us, it is an enduring relationship … a first and last resource when looking to buy something … and, more often than not, a source that surpasses the promises it has made.

To think of it as being an extended honeymoon is to look at Amazon in entirely the wrong way.