Saturday, February 9, 2013

Amazon (AMZN) Part III

I’ve included a picture of the spreadsheet at the end of this post.  In that spreadsheet, I have separated out the shipping fees collected on purchases from revenue because AMZN doesn’t actually sell shipping.  Instead, I included the shipping fees collected as part of non-operating income.  The 10-k implied that there were some shipping costs associated with “net services sales,” but I haven’t seen a specific amount, and I’m thinking that it isn’t much, so I’m just going to assume that all of the shipping fees collected were included in “net product sales.”  As far as total net sales go, it won’t make any difference anyway.  The shipping fees paid by AMZN for receiving goods is included in inventory, which as far as I’m concerned is fine, and results in those costs being recognized at the same time as sales are recognized.  Outbound shipping charges when AMZN offers free shipping are also included in the cost of sales, but I have chosen to separate those charges out, and list them as a separate expense, near Marketing.  This makes sense to me because AMZN states in the 10-k that they view those costs as marketing costs.

I would like to have been able to do the same kind of thing with depreciation, but AMZN includes depreciation expense in whatever the corresponding operating expense category is, and I’ve not been able to find a breakdown of how much is included in what category.

After changing the Income Statement around a bit to suit me, i.e. taking shipping fees received out of revenues, AMZN’s operating income was negative in 2011 and 2012.  Perhaps I should have netted out the shipping, which would have resulted in the same operating income as before, but the way I see it, the money AMZN collects for shipping isn’t really part of their operations, as I said earlier, but the cost of shipping is since shipping has to be paid on most of the stuff that AMZN sells, and AMZN stated in their own 10-k that they view those charges as marketing expenses.

Sales growth has been admirable, to say the least.  I just read an article somewhere that expressed concern about the deceleration of sales growth, which made me laugh because I think it’s a little bit unreasonable to think that sales are going to increase at 40% for long, when total sales are over $60B.

I’ve also included a same-size income statement, which shows everything on the income statement as a percentage of sales.  As I noted in my last post, there doesn’t really look like any single item that is alarmingly out of control.  The problem looks more like nearly every operating cost is rising slightly faster than sales, and in retail, where the net profit margin is only around 3% or so, it doesn’t take much to fall from a profit to loss.  And as it turns out, AMZN’s profit margin was only 3.5% when they were profitable.  The good news here is that AMZN’s gross margin is actually expanding a bit, just not fast enough to make up for the increasing cost of just about everything else.

So, at this point in time, I’m feeling pretty negative about AMZN.  Profitability has never been exceptional; it is about comparable to most retailers.  I realize that in the end what matters are cash flows, and having not really looked at those yet, I’m just going to take a guess and say it looks good.  I don’t say that for any reason other than AMZN put their statement of cash flows first in their 10-k, which is a subtle way of saying “this is the most important thing.”  I don’t know why, I just tend to look at things in this order: Income statement, balance sheet, and then cash flows.

I’m sure I’m missing all sorts of stuff here, and would appreciate any comments anyone out there might have.  Sometime in the next few days, I hope to move on to AMZN’s balance sheet.

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