We’ll give it to AMZN, this was an absolutely killer quarter relative to expectations, but on a stand-alone basis we’d characterize it as ‘better than decent’. We saw 21% revenue and gross profit growth, deleveraging into 2.5% EBIT growth and 7% earnings growth – nothing special there. But what we really liked was the 19% CFFO growth. Pretty much every line of the P&L beat expectations, though those results came with very clear slowing. Online stores slowed 600bps, AWS slowed 70bps, gross profit slowed 50bps to the new low since the recession. 1Q guidance looks reasonable with the top end of revenue showing a re-acceleration, and EBIT relatively in-line. But the top end of the EBIT guide implies a YY decline, and that is with help from $800mm in lower D&A expense from a useful life adjustment (You have to giggle a bit when a single Amazon quarter of server D&A useful life revision is approaching the annual EBIT of Kohls Corp). The concern for our position on the short side (which was predicated on slowing profit growth during an investing cycle against rising competition – a multiple compressor) is that with the comparison set-up, better than expected 4Q and the guidance, it looks like we are likely to see a re-acceleration in rev in 1Q, and potentially EBIT as well. The subsequent 2 quarters in our model will then each accelerate profits again. That’s when AMZN’s multiple tends to expand. At the same time, earnings expectations, at least as they stand today, look more reasonable. With that setup we are moving AMZN off the best ideas list to the bench. It will stay on the short side since we could be heading to Macro Quad 4 in 2Q20. Quad 4 is historically the time you really don’t want to own AMZN.
Revenue
- Total revenue slowed 400bps, and 650bps on a 2 year basis. International slowed more (600bps) given it had a tougher compare, NA excluding Whole Foods slowed 360bps.
- By business unit, online stores slowed 600bps to +15%, Physical Stores accelerated slightly, though were down 0.9%, AWS slowed 70bps to +34%, Retail Subscriptions slowed 180bps. The bright spot was 3rd Party Seller Services which accelerated 330bps as unit penetration was 53% in the quarter.
- If historical trend vs guidance is correct, we should see an acceleration in 1Q with results around the top end of guidance.
Margin
- Gross margin beat -- up 14bps YY when the expectation was for a decline, that’s an acceleration from down 68bps last Q.
- Margins were aided by outsized growth in high margin areas like AWS and advertising, while also getting a big help this Q from accelerating growth in 3rd party services.
- Also management noted that the investment into Prime 1day of $1.5bn in incremental shipping came in below its expectation. Management is guiding $1bn in additional costs YY for 1Q before we start to lap 1day shipping investments in 2Q which will lead to some moderation YY.
Cashflow
CFFO accelerated to +19% from -8% last Q, as we saw another quarter of sales outgrowing inventory as well as rising payable days. With the revision to D&A from the expected useful life of servers, management is signaling that should mean slightly lower capex needs relative to prior plans.
Ecosystem Reads
Shorter Holiday
Management does not think the shorter holiday selling period had any real impact on sales as they guided previously. This makes sense to us given Amazon is basically online only. If you want to buy online you will; it's when you rely on foot traffic, shopping center visits, and attachment that days will start to matter more.
“The way we look at it and the way we believe it works, at least in our business, is that customers will have a holiday budget, and they will spend it between generally the middle of November. It's creeping up to the early part of November through the holiday season. And we do see, obviously spikes in Black Friday and Cyber Monday, and we also see relative tick-up in trends as we get closer to the holiday and for the shipping threshold cutoff. So there's a polarization of tends to be a polarization to early purchase and late purchases.”
Still Investing to Be Faster
Amazon will be accelerating distribution SQFT growth to support 1day capabilities. “As we shift inventory to be more local, it will enable local deliveries to hit shorter cutoff times. So that will continue to become more efficient. We do see -- we will have to scale our fulfillment center network further. We grew the square footage for fulfillment and transportation by 15% each of the last 2 years. And we look ahead and see a step-up in that this year as we start to build more capacity for the 1-day.”
Amazon still wants to get faster and closer to the customer.
Grocery Delivery Growing Rapidly
This is a big battle ground area for both Amazon and the big B&M players. Amazon said “Our grocery delivery orders from the combination of Amazon Fresh and Whole Foods Market more than doubled in the fourth quarter year-over-year. So we believe customers are starting to notice and take advantage of this.”
