AMZN Management Thinks Profitability Improvement is for Losers
Wow! What a doozy yesterday was. We’re betting that if we told you that EBIT margin would decline by -229 Bps in Q1 2011 versus LY, many of you (and us) would have expected a share decline in the stock price. Well, we would have been wrong as the stock is trading up +4.5% today.
In fairness, items that were difficult to forecast all went against Amazon (AMZN – $192.30) to the tune of $0.13. Other Income/(Expense) cost AMZN ($0.06) versus a reasonable forecast. Taxes cost AMZN ($0.03) versus a reasonable forecast. Finally, Equity Method Investment activity cost AMZN ($0.04) versus a reasonable forecast.
Therefore, AMZN’s EPS in Q1 2011 was approximately $0.57 excluding items that were near impossible to forecast (these items are likely to continue to be a drag on AMZN’s bottom-line performance in the future).
That said, it’s interesting to hear many analysts laud the company’s strategy to “invest ahead of its growth.” That thesis works when discussing the company’s capital investment in fulfillment centers. But, AMZN’s Marketing Expense de-leverage (14 straight fiscal quarters) and a “shipping drag” of 83 Bps are material top-line drivers that will need to be anniversaried to maintain today’s market share gains.
If anyone thought AMZN management ‘cared’ about profitability prior to today… they certainly don’t any longer. Take a look at the company’s trailing 4-quarter EBIT margin run rate (click here). It’s ugly.
Clearly, investors are willing to stomach the company’s “investment spending” as long as top-line growth rates continue to remain at these levels. If the company’s top-line growth rate were to decelerate, AMZN’s stock price would suffer a dramatic blow.
While profitability comparisons ease a bit as the year progresses, a best case scenario seems to suggest EPS of $2.43 in FY 2011. This scenario assumes that top-line growth rates stay at Q1 2011 levels and that the company’s EBIT margin declines -189 Bps in Q2 2011, -91 Bps in Q3 2011, and are flat in Q4 2011.
Even these projections of material de-leverage may be a bit optimistic. We’ll see.
Click here to see our latest EPS model and company Data Packet.
