The consensus will be beating their chests talking about the massive EPS beat from AMZN this quarter. And while we’re rarely in line with the Street, this time it’s deserved. We were 2x the Street’s EPS estimate this quarter (and guidance) and the company still blew away our number by putting up $10.30 to our $2.81 (Street at $1.48). We’ve been highlighting how the rapidly accelerated shift to ecommerce is going to be very bullish for ecommerce players for a very long time, and very bad for brick and mortar players that don’t have a very compelling reason for customers to get in the store. Seeing Amazon’s results really drive home the new reality. Accelerating revenue, capacity additions, accelerated hiring, and new highs in its contribution to US retail growth and online retail share, now nearly 40%. Prime membership growth has reaccelerated, and the company doesn’t have space to stock all the product needed headed towards peak demand of holiday season. Too much demand is a nice problem to have and 40% revenue growth for a company doing over $300bn in revs is impressive, to say the least. The question to ask today, is whether things can actually improve from here in Global Retail for AMZN, or is this as good as it gets? We think there’s still more room to go, with Int’l as the biggest kicker.
Trend
Revenue accelerated 1380bps to +40.2% driven by strength in North America which was up just over 50% ex Whole Foods stores. Online stores grew 47.8% and nearly doubling the growth rate of last quarter. Third party sellers performed just as well and the penetration ticked back up to 53% of units.
International saw a massive ramp as well, with its growth rate more than doubling to 41%, a 2100bps growth acceleration on tougher comparison. International also delivered its first real profitable quarter.
AWS is now the growth laggard, at +29% it slowed from 32.8% last Q on a easier compare for a 400bps slowdown on the 2 year. Margins were solid though up 575bps on an easier compare, putting up as good a profit rate as we have seen from AWS. When asked about the growth rate expectation management noted: “what we see are companies are working really hard right now to cut expenses, especially in the more challenged businesses like hospitality and travel, but pretty much across the board. We're helping them. We're actively, with our sales force, looking for ways that we can help them save money. This includes things like scaling down the usage where it makes sense.”
Gross margin was down 192bps on an easier compare, but operating margins expanded 171bps from outsized revenue growth driving expense leverage and the company pulling back on marketing, as it really had too much demand, and marketing market rates declined.
Guidance for 2Q is above the street on revenue and about inline on EBIT, though the top end of revs implies about a 700bps slowdown in growth. The midpoint of EBIT implies 10% growth YY and about 75bps of margin compression. Covid related expenses are expected to be ~$2bn or half of what was guided for 2Q.
The company is also ramping spending to increase fulfillment capacity as it heads into the back half of the year when demand is seasonally higher. Management stated: “Q2 is typically our lightest volume quarter for the retail business. That's not the case this year, but what that meant is that we can flex into space normally used for second half peak demand. This led to strong operating leverage in Q2. As we move towards peak in the second half of the year, we will ramp up our space needs even further, and we'll be adding significant fulfillment center and transportation capacity in the second half of the year.”
Inventory was only up 5% at Q end with 40% revenue growth, so AMZN is running lean, probably too much so. Management stated “Now as we move into Q3, we're starting to -- we need to build the inventory more for Q4, and we've run out of space. So we've got our hands full on that challenge, but we've got a really good team that's been working very hard probably since late February on this issue.”
Tail & Ecosystem
It’s rather effortless to see the huge market share opportunity that has been presented to Amazon. Right now the concentration is in share of wallet in existing categories vs expansion into other businesses. The company, like many others, isn’t really generating video content right now to protect the crew/actors, and perhaps other initiatives have been placed on hold. But the company noted accelerating rates in Prime membership growth this Q in both US and international. It seemed as if Prime was getting tapped out, and there is a whole new wave of members to take share with now.
After struggling in grocery for years, online grocery tripled this quarter. The company is adding further capacity to support it and capitalizing on the big consumer behavioral shift.
AWS is seeing weaker growth near term as companies look to cut costs within the tough economic environment, but more and more companies should want the flexibility of cloud services and the value of AWS offering in the coming years. Many new online and ecommerce businesses are popping up, the digital/online economy is ramping, and if they don’t use AWS now, as they get bigger they probably will.
Alexa is present as million of US students are learning from home, learning more about all of us than ever before. Is education a category for Amazon to further penetrate?
Finally, Amazon’s relevance in retail and ecommerce is of course reaching new highs. The below charts show a couple metrics. Within the incremental US retail sales of the last 12 months, Amazon made up about 60%. Amazon’s share in ecommerce continues to grow, it is now approaching 40% of non-store retail.
