Why Amazon Is Thinking Outside the Two-Day Delivery Box
The timing of Amazon's (AMZN) - Get ReportPrime Day push last week to get new signups for its subscription-based premium service couldn't have been better, according to Pacific Crest analyst Edward Yruma, as the company continues to optimize profitability and reduce costs.
The biggest improvement Yruma believes Amazon has made is that it has broken out of Prime's original two-day delivery promise to provide one-day and even same-day deliveries. But the firm also notes that customers are increasingly using Prime's four-to-five-day delivery option.
"We believe that these slower-speed, incremental-cost or add-on item options have become significantly more prevalent, particularly as Amazon has pushed into household items and food," Yruma wrote. "We also think that Amazon continues to exert stronger merchandising capabilities in an effort to optimize overall electronic and general merchandise (EGM) profitability."
Amazon -- a key holding of the Growth Seeker portfolio -- is showing other companies the importance of containing costs in order to expand margins and drive profits as revenue grows, according to Growth Seeker co-manager and Cocktail Investing co-author Chris Versace.
"Given the vast majority of Amazon's consumer-facing business requires both logistical movement of product and delivery to customer, shipment cost is a natural agenda item," Versace said in an email exchange today. "We've seen Amazon continue to focus on this, with its leasing of cargo planes from Air Transport Group Services (ATSG) and follow-on investment in the company. Amazon is also working on replacing boxes with flat shippable envelopes, where it makes sense."
Meanwhile Pac Crest remains impressed with Amazon's market-leading AWS cloud computing service.
"Fulfillment cost remains an area of focus; investments in 'Air Amazon' may be offset by shipping optimization. Our AWS channel checks, both internationally and domestically, indicated healthy demand across a range of business verticals," Yruma wrote. "We also had very consistent feedback that resellers are recommending Reserved Instances (cloud service) and customers are steadily adopting this feature."
As a result of these cost controls and growth drivers, Yruma and his team forecast second-quarter earnings ahead of Wall Street expectations when the company reports on July 28. The firm expects the company to report EPS of $1.28 against analysts' current $1.14 a share expectations.
Versace shares Yruma's bullish stance, but cautions the company needs to continue to watch its margins as revenue grows.
"We see this focus as extremely important to future profit generation -- not only as consumers continue to shift more purchases online, but also as Amazon expands its fresh food and pantry business, and enters into the private-label apparel business. Revenue growth is great, but if costs spiral out of control, odds are pretty good profit growth will lag," Versace concluded.
Editor's Note: This article was originally published at 12:01 p.m. EDT on Real Money on July 20.