Club holding Amazon (AMZN) reported better-than-expected results for the second-quarter after the closing bell Thursday, and the stock soared in extended-hours trading. Net sales increased 7% year over year to $121.23 billion, beating estimates of about $119 billion, according to FactSet. Operating income was much better than expected at $3.3 billion versus estimates of $1.8 billion. This was also much better than what management previously guided to. Last quarter the company said it expected an operating loss of $1 billion to a profit of $3 billion in the second quarter. Earnings per share were tricky, making operating income the better tell on how the business performed in the quarter. Here’s why. Amazon reported a 20-cent per share loss in the quarter. But this included a pre-tax valuation loss of $3.9 billion in non-operating expense from the company’s investment in Rivian Automotive (RIVN). Bottom line Overall, Amazon posted a strong result against low expectations, thanks to strength in high-margin areas like Advertising, its Amazon Web Services (AWS) cloud business, and Third-Party Seller Services while costs pressures started to move in the right direction. Although third-quarter operating income guidance was lighter than expected, it appears the outlook was much better than feared. Plus, the better-than-expected net sales view suggests the company is seeing no real slowdown in demand for its products and services despite concerns of a global economic slowdown. The better-than-expected quarterly result and not as-bad-as-feared guide are causing shares to surge about 13% higher in after-hours trading to about $138, a level that was last seen in April. We never like chasing a stock on a spike like that, but Amazon’s improved handling of costs pressures and no signs of a slowdown across its business (especially in high-margin areas) is a big positive as we look to the second half of the year. Inflation CFO Brian Olsavsky provided an update on Amazon’s cost and inflationary pressures during the conference call. (Recall that in the first quarter, Amazon experienced $6 billion of incremental costs compared to the prior year.) For Q2, he cited “solid progress” in working down these costs. Incremental costs in the quarter were in line with management’s expectations at about $4 billion compared to the prior year. Inflationary pressures are still an issue, mostly due to higher fuel, trucking, and air and ocean shipping rates. Management expects these pressures will continue into the third quarter. On the fulfillment network productivity side, Amazon’s staffing levels were more in line with rising second quarter demand and the company experienced a more optimized fulfillment network. In transportation, Amazon made improvements to its delivery, route density, and package deliveries per hour. Management sees more room for improvements in the back half of the year. On fixed cost leverage, the year over year negative impact was said to be relatively consistent with the first quarter. There are two main drivers: First is an unfavorable comparison to high holiday level utilization rates the company saw in the first half of 2021, a time when mobility was still limited by Covid-19; and second is the normal step down in volumes off Amazon’s fourth quarter peak that it saw in the first half of 2022. On this first point, Amazon sees this tough year over year comp ending in the second quarter. On the second point, Amazon continues to plan to grow into its capacity while slowing future network capacity additions. On interesting side note, we should point out is that Amazon said is not experiencing the same discounting pressures big-box retailers like Target (TGT) and Club holding Walmart (WMT) are currently experiencing. Guidance For the third quarter, which includes Amazon’s Prime Day event, management’s guidance was not as strong as what some analysts expected. Amazon expects sales to be between $125 billion to $130 billion, representing year-over-year growth of 13% to 17%. At the $127.5 billion midpoint, this guide is higher than the $126.5 billion the Street consensus was looking for. Guidance anticipates an unfavorable impact of approximately 390 basis points for foreign exchange rates. Operating income is expected to be between breakeven and $3.5 billion At a midpoint of a $1.75 billion profit, this was much lower than estimates $4.4 billion. This outlook assumes a $1.5 billion quarter over quarter cost improvement in its fulfilment network operations, but this will be largely offset by investments in AWS and additional digital content for Prime members. At AWS, Amazon sees higher infrastructure investments to support continued strong customer growth and also increased energy costs at its data centers. As for the digital content, get ready for Thursday Night Football and a new show called “The Lord of the Rings: The Rings of Power.” Although Amazon’s guidance was weaker on both ends, investors are likely looking past the numbers under the thinking that Amazon is back to its old ways of conservative guidance and big operating income beats. Geographic Q2 sales In North America, sales increased 10% year-over-year to $74.43 billion, beating estimates of $70.82 billion. Operating income was a $627 million loss, but that was much better than estimates of $1.59 billion loss. This means the operating margin was minus-0.8%, better than to estimates of minus-2.2%. International sales fell 1% year-over-year, excluding foreign exchange (FX) at $27.07 billion, missing estimates of $29.63 billion. The operating loss was slightly narrower-than-expected at a $1.77 billion versus an estimate loss of $1.99 billion. This means the operating margin was minus-6.5% compared to estimates of minus-6.8%. Segment Q2 sales Online Stores: $50.86 billion, flat over year ex-FX, versus $51.78 billion expected. Physical Stores, mostly Whole Foods: $4.72 billion, up 13% year over year ex-FX, versus $4.39 billion expected. Third-Party Seller Services, commissions and any related fulfillment and shipping fees, and other third-party seller services: $27.38 billion, up 13% year over year ex-FX, versus $25.88 billion expected. Subscription Services, mostly annual and monthly fees associated with Amazon Prime membership: $8.72 billion, up 14% year over year ex-FX, versus $8.83 billion expected. AWS: $19.74 billion, up 33% year over year ex-FX, versus $19.55 billion expected. The segment reported operating margins of 29%, a bit below estimates of about 30.8% but solid improvement from 28.3% in the second quarter of last year. Management reiterated that AWS’ margin will fluctuate quarter to quarter, but the overall trend in the business remains healthy. The AWS backlog ended the quarter up 65% year over year or about 13% quarter over quarter. Advertising Services: $8.76 billion, up 21% year over year ex-FX, versus $8.65 billion expected. Speaking to the strength this high margin business is seeing, on the call, Olsavsky said Amazon has an advantage of “highly efficient advertising.” He added, “People are advertising at the point where customers have their credit cards out and are ready to make a purchase.” He continued, “It’s also very measurable. And when people are looking — if companies are looking to potentially streamline or optimize their advertising spend, we think our products compete very well in that regard, in addition to maybe longer-term things like brand building and brings new selection to bear in front of customers.” Other, sales related to various other service offerings: $1.07 billion, a surge of 135% year over year ex-FX, vs. $511 million expected. (Jim Cramer’s Charitable Trust is long AMZN and WMT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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An Amazon truck is seen entering the LDJ5 Amazon Sort Center on April 25, 2022 in New York City.
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