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Amazon's profit falls 8% despite 51% jump in sales

The giant online retailer blames the drop in second-quarter net income on a rise in operating expenses, including new distribution centers. The firm's stock climbs after the earnings report.

July 27, 2011|By Shan Li, Los Angeles Times
  • Leacroft Green moves a packageat an Amazon building in Goodyear, Ariz.
Leacroft Green moves a packageat an Amazon building in Goodyear, Ariz. (Ross D. Franklin, Associated…)

Even as Amazon.com Inc. gears up for a legal battle over sales tax in California, the online retailer's stock continues to climb after posting second-quarter results that beat Wall Street expectations.

The company reported that sales jumped 51% to $9.91 billion for the quarter that ended June 30, compared with $6.57 billion in the same period last year.

Chief Executive Jeff Bezos said in a statement that competitive pricing and expanded selections were driving "the fastest growth we've seen in over a decade."

However, even as sales boomed for the company, its profit dropped 8% to $191 million, or 41 cents a share. A year earlier it reported profit of $207 million, or 45 cents.

Amazon blamed the decline in profit on a 54% rise in operating expenses to $9.71 billion.

Most of the added expenses — including new distribution centers and increased advertising for the Kindle e-reader — are "smart" investments, said analyst Dan Geiman, that should position the company for the future.

"There's a kind of catch-up involved with adding facilities to keep up with their growth," said Geiman, who is with the Seattle brokerage firm McAdams Wright Ragen. "The company discontinued building distribution centers when the economy was weak, but that is something they have restarted in the last year or so."

The growing popularity of digital content has also driven Amazon to focus on selling electronic goods, Geiman said, as customers flocked to e-books and downloaded music instead of buying old-fashioned paperbacks and CDs.

"There are a lot of costs related with converting a business from focusing on the physical to the digital," he said. "It involves hiring computer programmers, lots of IT people."

He said investors expect that the investments will eventually pay off.

The earnings report drove Amazon shares up to $227.30, a 6.1% gain, in after-hours trading on Tuesday after closing at $214.18, up 69 cents. The stock price is up almost 20% year-over-year.

Amazon said it expected sales to grow again in the third quarter to $10.3 billion to $11.1 billion.

The Seattle company has been in a legal battle with California over a new law in the state that requires the online retailer to collect sales tax. The struggle has not adversely affected Amazon's business, Geiman said.

But that could change.

"They are fighting the law tooth and nail," the analyst said. "There could be an impact on sales."

shan.li@latimes.com

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