Practical Ecommerce

Amazon 2013 Financial Results Signal Changes in 2014

After a few dismal quarters, Amazon turned a profit in the pivotal fourth quarter of 2013 and for the full fiscal year, despite losses in the second and third quarters. Nevertheless, Amazon stock slumped after the announcement of the financial results.

Fourth Quarter 2013

Net sales increased 20 percent to $25.59 billion in the fourth quarter, compared with $21.27 billion in fourth quarter 2012. Operating income increased 26 percent to $510 million in the fourth quarter, compared with $405 million in the same period in 2012. However, Amazon missed Wall Street’s expectation that sales would reach $26.06 billion and the stock price fell.

Net income increased to $239 million in the fourth quarter, or $0.51 per diluted share, compared with $97 million, or $0.21 per diluted share, in fourth quarter 2012.

Full Year 2013

Net sales increased 22 percent to $74.45 billion, compared with $61.09 billion in 2012. Operating income increased 10 percent to $745 million, compared with $676 million in 2012. Net income for the year was $274 million, an improvement over the net loss of $39 million in 2012.

In 2013, 60 percent of Amazon’s sales came from North America, compared with 57 percent in 2012. North American sales grew 28 percent over the previous year, while international sales grew at a relatively sluggish 14 percent. Shipping revenue contributed 4.1 percent of Amazon’s total revenue and shipping costs consumed 8.9 percent of revenue. In dollars, Amazon lost a staggering $3.5 billion on shipping.

Amazon realizes that Wall Street is losing its patience with missed revenue targets and increasing costs. The company has already instituted some fee increases and may be considering others.

Amazon realizes that Wall Street is losing its patience with missed revenue targets and increasing costs. The company has already instituted some fee increases and may be considering others.

Amazon Raises Fees for Certain Sellers

Starting this month, merchants that use Amazon’s Webstore platform and Fulfillment by Amazon (FBA) services saw their fees increase. The Webstore-only subscription fee increased from $39.99 to $79 per month on February 4. Webstore merchants who also use Selling on Amazon, previously paid no fee but are now also subject to the $79 monthly charge.

As for the FBA program, effective February 18 Amazon will increase its pick and pack and weight handling fees as well as monthly storage fees. Monthly storage fees will increase three to four cents per cubic foot, depending on the season. In May Amazon intends to introduce an apparel service fee that reflects additional costs of handling, storing, and packing for these items.

Prime Price Hike on the Horizon?

During December, Amazon obtained a record number of new Prime members and decided to limit new signups because it loses money on the program. Last month on its fourth quarter earnings call Amazon announced that it is considering raising the price of the Prime service to either $99 or $119. This would be the first increase since the service was established nine years ago. Since the program began, the number of products available for free two-day shipping has grown from one million to 19 million.

Amazon CFO Tom Szkutak attributed the possible increase to rising fuel and shipping costs combined with the fact that the service is growing in popularity. The greater the usage, the more Amazon loses on the service. In the past, Amazon has used the service as a loss leader to increase sales but is now rethinking that approach. Forrester Research analyst Sucharita Mulpuru estimates that Amazon loses $1 billion to $2 billion a year on the Prime program.

“We know that customers love Prime as the usage of the shipping benefit has increased dramatically since launch. On a per customer basis, Prime members are ordering more items across more categories with free two-day shipping than ever before,” Szkutak said on the call.

Amazon Prime is not just for shipping. It also offers members unlimited instant streaming of movies and TV shows and books from the Kindle library. Amazon is investing in more original content to make Prime more attractive and compete with Netflix. Amazon is also securing streaming rights to popular television shows.

Will Amazon lose some of its loyal customers if it increases the fee? A recent Wall Street Journal poll of customers suggests that 47 percent of Prime members might quit if the price increases. While Amazon does not make public the number of Prime subscribers, analysts estimate the figure at about 20 million. Currently, Prime customers spend twice as much as regular Amazon customers. Analysts are speculating that the announcement of the possible increase during the earnings call was a trial balloon to gauge the reaction of Prime members and financial analysts. While Wall Street analysts might applaud the move — which could add $500 to $800 million in revenues — customers may balk.

Sales Tax

Amazon continues to support a national solution to the sales tax issue. In the meantime, it is negotiating individual agreements with states. In its 10K report Amazon stated that, “More than half of our revenue is already earned in jurisdictions where we collect sales tax or its equivalent.” In 2014, more states may pressure Amazon to collect sales tax or build warehouses and create new jobs.

Conclusion

This year Amazon will address its steeply rising costs by raising fees for both its merchant partners and for customers. The days when the company’s stock would rise regardless of financial results seem to be over and Amazon is making the necessary correction.

Marcia Kaplan

Marcia Kaplan

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