Amazon 2013 Financial Results Signal Changes in 2014

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

Fourth Quarter 2013

Internet earnings 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. But, Amazon missed Wall Street’s expectation that sales would reach $26.06 billion and the stock price dropped.

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.

Total Year 2013

Net earnings 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 earnings 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 last year, while international sales grew at a comparatively slow 14 percent. Shipping earnings contributed 4.1 percent of Amazon’s total earnings and transport costs consumed 8.9 percentage of earnings. In dollars, Amazon dropped a staggering $3.5 billion on transport.

Amazon realizes that Wall Street is losing its patience with missed earnings targets and raising costs. The business has already instituted some fee increases and might be considering others.

Amazon realizes that Wall Street is losing its patience with missed earnings targets and raising costs. The business has already instituted some fee increases and might be considering others.

Amazon Raises Fees for Certain Sellers

Beginning this month, merchants using Amazon’s Webstore platform and Fulfillment by Amazon (FBA) services saw their charges increase. The Webstore-only subscription fee increased from $39.99 to $79 a month on February 4. Webstore merchants who also use Selling on Amazon, formerly paid no commission but are now also subject to the $79 monthly fee.

In terms of the FBA program, effective February 18 Amazon will boost its pick and pack and weight handling fees in addition to monthly storage fees. Monthly storage prices will increase a few cents per cubic foot, depending upon the year. In May Amazon plans to present an apparel service fee which reflects extra costs of handling, storing, and packaging for these things.

Prime Price Hike on the Horizon?

Throughout December, Amazon acquired a record number of new Prime associates and chose to limit new signups since it loses money on the program. Last month on its fourth quarter earnings call Amazon announced that it is considering increasing the price of the Prime service to either $99 or $119. This could be the first increase since the service was created nine years back. Since the program started, the amount of products offered for free two-day shipping has risen from one million to 19 million.

Amazon CFO Tom Szkutak attributed the possible increase to rising gas and transport costs together with the fact that the support is increasing in popularity. The greater the usage, the more Amazon loses on the ceremony. Previously, Amazon has used the service as a loss leader to boost sales but is now rethinking that approach. Forrester Research analyst Sucharita Mulpuru estimates that Amazon loses $1 billion to $2 billion annually on the Prime program.

“We know that clients love Prime as the use of the delivery advantage has increased dramatically since launching. On a per client basis, Prime members are ordering more things across more classes with free two-day shipping than ever before,” Szkutak said on the telephone.

Amazon Prime isn’t just for shipping. Additionally, it offers members unlimited immediate streaming of films and TV shows and novels from the Kindle library. Amazon is investing in more original content to create Prime more appealing and compete with Netflix. Amazon is also securing streaming rights to popular television shows.

Can Amazon lose some of its loyal customers if it raises the fee? A current Wall Street Journal poll of clients indicates that 47 percent of Prime members may quit if the price rises. While Amazon doesn’t make public the amount of Prime subscribers, analysts estimate the amount at about 20 million. Currently, Prime clients spend twice as much as ordinary Amazon clients. Analysts are speculating that the statement of the possible increase during the earnings call was a trial balloon to gauge the response of Prime members and financial analysts. While Wall Street analysts may applaud the move — that could add $500 to $800 million in revenues — clients may balk.

Sales Tax

Amazon continues to encourage a national solution to the sales tax problem. In the meantime, it’s negotiating individual agreements with states. In its 10K report Amazon stated that,”More than half of our earnings 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 construct warehouses and create new jobs.

Conclusion

This year Amazon will tackle its steeply rising costs by increasing fees for both its merchant partners and for clients. The days once the provider’s stock would rise regardless of financial results appear to be over and Amazon is making the essential correction.