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Amazon Shatters Expectations, Pulls First $5 Billion Quarterly Profit

Amazon just keeps outperforming itself, it seems.

The e-commerce giant reported net sales of $88.9 billion in the second quarter, and generated earnings of $10.30 per share—shattering the $1.46 per share analysts polled by Refinitiv expected to see in the quarter. Amazon stock popped more than 6 percent within 30 minutes of the report’s release.

The considerable earnings jump stands out when taking into account that Amazon spent $4 billion during the quarter on COVID-19 related costs.

In a Nutshell: Amazon said it expects to spend more than $2 billion during the third quarter on additional coronavirus-related measures, including procuring personal protective equipment, deep cleaning its facilities and wage increases for employees.

Continuing the spending trend that occurred in the first quarter, shipping costs rose 68 percent to $13.6 billion in the quarter.

Meanwhile, Amazon also said it invested more than $9 billion into capital projects, and saw its grocery delivery capacity skyrocket by more than 160 percent amid a threefold spike in online grocery sales during the quarter.

Brian Olsavsky, Amazon’s chief financial officer, said in an earnings call that the profit came as a surprise even to Amazon given that shoppers were buying lower-margin products when they issued their second quarter forecast.

“Everyone was looking for masks; everyone was looking for gloves; everyone was buying groceries online. That mix is not super profitable,” Olsavsky said. “What we saw in Q2 was not only did the mix start to shift back to a more normal mix,” but that “we also were able to ship a lot more than we had originally thought.”

In the middle of a major pandemic where customers are coming to Amazon left and right for their shopping needs even as stores have largely reopened, the e-commerce giant has had plenty of pressure on itself to ensure it is fulfilling its one- and two-day deliveries promised to Prime members, who are paying $119 per year for free shipping among other loyalty perks.

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Despite the need for investments, Amazon, perhaps not surprisingly, maintains maintains a healthy cash flow. Operating cash flow increased 42 percent to $51.2 billion for the trailing 12 months, compared with $36.0 billion for the trailing 12 months ended June 30, 2019.

Amazon also confirmed it will hold its annual Prime Day shopping event in the fourth quarter. Earlier this month, Amazon confirmed it would postpone this year’s Prime Day as a result of COVID-19 concerns, but it stopped short of providing a date. The company previously told third-party sellers to use the week of Oct. 5 as a placeholder date.

For the third quarter, Amazon said it expects net sales to come in between $87 billion and $93 billion, representing year-over-year growth between 24 percent and 33 percent. The company anticipates a range of an operating income of $2 billion and $5 billion, which factors in the COVID-related investments.

Amazon’s earnings report came a day after CEO Jeff Bezos testified in a long-awaited congressional hearing in relation to antitrust concerns and whether Amazon has used third-party seller data to create competing private label products.

Net Sales: Net sales soared 40 percent to $88.9 billion compared with $63.4 billion a year ago, and came in well ahead of the $81.6 billion estimated by Refinitiv analysts. Sales in North American were up 43 percent to $55.4 billion, while international sales grew 38 percent to $22.7 billion.

Third-party sales grew 52 percent year-over-year to $18.2 billion during the quarter, outpacing growth in Amazon’s first-party sales, which increased 48 percent year-over-year to $45.9 billion.

Revenue for Amazon’s cloud-computing unit, Amazon Web Services (AWS), came in at $10.8 billion for the quarter, a 29 percent jump from the $10.2 billion made in the quarter last year. However, this number is less than the $11.02 billion consensus among analysts polled by FactSet. While AWS has traditionally been the company’s biggest profit driver, the 29 percent increase is actually the first sub-30 percent growth number since the e-commerce giant started revealing the statistic in the first quarter of 2017. This is also the first time since then that AWS wasn’t the fastest-growing segment of the company.

Subscription services, which largely consists of Amazon Prime membership payments, were up 29 percent to $6.02 billion. Amazon’s “other” category, which mostly covers the company’s advertising business, was up 41 percent to $4.22 billion in revenue.

Net Earnings: In total, Amazon saw net income of $5.2 billion, or $10.30 per diluted share, marking the company’s first ever $5 billion quarter and doubling the $2.6 billion, or $5.22 per diluted share, brought in during the second quarter of 2019.

Operating income increased to $5.8 billion in the second quarter, compared with operating income of $3.1 billion in the prior year’s quarter.

CEO’s Take: Bezos highlighted the $4 billion investment in the second quarter as the key point to keeping employees safe and delivering products to consumers in a time of high demand, noting that $500 million of that to front-line employees and delivery partners as a “thank you bonus.”

“This was another highly unusual quarter, and I couldn’t be more proud of and grateful to our employees around the globe,” Bezos said. “We’ve created over 175,000 new jobs since March and are in the process of bringing 125,000 of these employees into regular, full-time positions. And third-party sales again grew faster this quarter than Amazon’s first-party sales. Lastly, even in this unpredictable time, we injected significant money into the economy this quarter, investing over $9 billion in capital projects, including fulfillment, transportation and AWS.”