1. News
February 1, 2019

Amazon announces record profit but downbeat sales forecast

Amazon’s net sales increased 20% year-on-year in its fourth-quarter (Q4), but lower-than-expected sales forecasts for Q1 hit share prices.

By Deborah Williams

Amazon’s net sales increased 20% year-on-year in its fourth-quarter (Q4), but lower-than-expected sales forecasts for Q1 hit share prices.

The online retailer reported $72.4bn revenue for its 2018 Q4 Christmas period compared with $60.5bn in 2017, surpassing $3bn in profit for the first time, but representing the slowest sales increase since 2015.

GlobalData analyst Neil Saunders said: “In our view, there are several dynamics at play here. First is the maturity of Amazon’s operation. Amazon is now a massive retailer and it is simply unrealistic to expect it to keep on growing at its historic pace. However, more concerningly, this maturity is also coinciding with a period of rising competition.

“Retailers like Target and Walmart have invested heavily in their online operations and pulled out all the stops this holiday season. Our data show that they made solid customer gains and some of that dinted Amazon’s growth. In our view, the gap between Amazon and the rest is now narrowing.”

Q1 sales were predicted to rise between 10% and 18% ($60bn and $56bn), lower than analysts’ forecasts, and shares fell by almost 5% in after-hours trading. Amazon claims currency exchange rates were partly to blame but international sales have grown following Amazon’s investments in markets such as India and Australia.

Saunders said: “Overall, Amazon has ended its fiscal year on a positive note. However, there is now a clear divergence in performance between the top and bottom lines – with the latter accelerating and the former decelerating. On the profit front, Amazon’s results are impressive.”

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Amazon sales: profitable businesses to boost revenue

To offset lower margins of the business, Amazon has been refining operating costs and profitable businesses such as its cloud computing enterprise, advertising, Amazon Web Services (AWS) and US supermarket chain Whole Foods, bought for $13.7bn in 2017.

Saunders said: “Another area of concern is Whole Foods. Amazon’s results show that sales at physical stores dropped by 2.7% over last year largely thanks to the grocery division.

“The investment in lower prices and fewer trading days to last year partly explains this, but it does not change the fact that Whole Foods is not performing as well as it should.

“Despite these niggles, we remain positive about Amazon. The Prime platform still has enormous potential, there is plenty of upside in devices, and there are many opportunities to improve own-brands, some of which have underperformed.

“Taken together, along with AWS, this means Amazon has scope for future growth. However, it is also clear that Amazon will now need to work doubly hard to achieve any future sales gains.”