Amazon’s bet on one-day deliveries helps drive better-than-expected sales

Amazon executives bet big in 2019 that consumers would spend more if they could get products delivered even faster. The Seattle technology and commerce giant spent most of the year and billions of dollars to make one-day delivery a reality for its best customers, and the bet appears to be paying off.

Amazon’s $3.3 billion fourth-quarter profit, reported Thursday, blew past analyst expectations. Sales of $87.4 billion exceeded the company’s own forecasts, with cloud computing juggernaut Amazon Web Services contributing mightily. Investors bid up Amazon shares in after-hours trading, again taking the company’s market value over $1 trillion.

The company also disclosed it has more than 150 million paying customers for its Prime membership program, a closely watched metric last updated in April 2018, when CEO Jeff Bezos said 100 million people were part of the program.

Amazon’s fourth-quarter profit of $6.47 a share, up more than 7% from a year earlier, was well above the $3.98-per-share consensus estimate of Wall Street analysts. Many were expecting the company’s heavy spending on faster delivery for Prime customers to weigh on the bottom line.

Chief financial officer Brian Olsavsky said spending on the one-day shipping initiative in the fourth quarter was less than the $1.5 billion previously expected. Still, worldwide shipping costs reached nearly $12.9 billion in the fourth quarter, up 43%.

“We are getting more efficient as we go,” he said, adding: “We’re putting inventory in the right places, getting it closer to customers, and being able to handle it and transfer it more smoothly through network.”

Olsavsky said that’s part of what’s driving sign-ups for Prime, which costs $119 a year for unlimited shipping, media services, discounts and other new perks, such as grocery delivery, which used to carry a $14.99 additional monthly fee that Amazon dropped last quarter. New Prime subscriptions set a record in the fourth quarter, he said.

Amazon grew its full- and part-time staff to more than 798,000, up 23% from 2018. Ongoing expansion of its fulfillment and delivery networks, related to the move to faster shipping speeds, accounted for much of the hiring. Olsavsky said Amazon is also continuing to add software engineers in the AWS and Alexa businesses, and in sales and marketing and operations.

Amazon expects first-quarter sales growth of 16% to 22%, to between $69 billion and $73 billion. It expects operating income to be $3 billion to $4.2 billion, which would be a decline, even at the high end, from the $4.4 billion posted in the first quarter of 2019. But Olsavsky noted that quarter was Amazon’s most profitable, following a multiyear investment cycle.

Amazon still has more to do in 2020 to expand the availability of one-day shipping, which will cost an extra $1 billion in the current quarter.

“We’re still developing plans,” Olsavsky said. “We do know the one-day shipping does put a lot of onus on us to continue to build our transportation capacity as well as our fulfillment center capacity.”

He added that Amazon expects to accelerate spending year over year on video and the data centers underpinning AWS.

While Amazon did not extend its financial forecast for the full year, Olsavsky’s comments seemed to indicate a lower level of investment than some analysts were expecting.

Brent Thill, who leads tech sector coverage at investment bank Jefferies, said this was a key question hanging over Amazon’s stock price going into the earnings report. While Amazon has long been willing to spend heavily in pursuit of new initiatives, investors still try to trim their stake in the company during periods of heavy investment.

“Everyone wants to drink the wine after it’s picked rather than watching it grow,” he said. “It’s honestly that simple.”

While the growth rate in AWS business did slow, Olsavsky suggested that’s largely a result of its enormous size: Net sales in the quarter were $10 billion, up 34%, while at the end of 2018 it was a $7.4 billion business growing at a 46% clip.

The business segment had operating income of nearly $2.6 billion, more than two-thirds of Amazon’s companywide quarterly operating profit.

Amazon’s “other” business segment, largely composed of its fast-growing advertising business, saw sales rise 41% in the quarter to nearly $4.8 billion.

Sales at Amazon’s portfolio of physical stores, including Whole Foods Market, were down 1% to nearly $4.4 billion. Olsavsky attributed some of the decline to the growth of grocery delivery, which more than doubled in the quarter from the year-earlier period.

“That’s where a lot of the growth has been,” he said. “We don’t necessarily care that much whether it’s in-store or delivered as long as we’re meeting customer demands.”

Amazon, which sells a great many products made in China, has yet to see any impact from the outbreak of the new coronavirus that originated in Wuhan, China. “We’re watching it very closely,” Olsavsky said, noting that Amazon has put travel restrictions in place.

For all of 2019, the company had sales of $280.5 billion, up 20% from 2018, not including a $2.6 billion negative impact from foreign exchange rates. Full-year profit of $11.6 billion, or $23.01 a share, was up 14.8% from 2018.