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AMZN: Share prices fall due to rising operating expenses … on-line retailing isn’t asset-lite after all July 26, 2010

Posted by Bob Cook in Company Case Studies, Financial Planning & Analysis.
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The Wall Street Journal reported last week in “Rising Costs Clip Amazon Shares” that Amazon’s “operating expenses … jumped 40% … triggering a sharp fall in its shares.”   Investors were expecting soaring revenue numbers to result in a greater bottom line than they did.

To what extent did real estate contribute to this rise in operating expenses?  Not too much if one just looks at the size of the real estate portfolio reported in the company’s 10-K’s.  From FY2007 to FY2009, the square footage in Amazon’s “fulfillment and warehouse operations” portfolio grew by only 29% … vs 64% for revenue.  That’s pretty good for an expanding company.

The growth in the company’s Fixed Assets is, though, another story.  Fixed Assets grew, during that same time period, from $ .5 B to $ 1.3 B … an increase of 137%.  Much of that is undoubtedly IT investments, but more than an insignificant portion may be investments in buildings to support operations. Depreciation charges are quickly rising.

And, the Fixed Asset build-up continues unabated.  Fixed Assets rose from $1.3 B for FY2009 ending Dec 2009 to $1.7 B for the quarter ending June 2010, fueling even more depreciation. 

This latest step-up in Fixed Assets may reflect Amazon’s putting in place the $278 M of “Construction in Progress” it had at the end of FY2009.  And this is part of a larger story:  Amazon has had quite a bit of real estate in the pipeline … 13 new fulfillment centers, to be exact … and this recent quarter may have been when their expenses started to hit the P&L.  The next time Amazon reports the square footage of its portfolio, we’re likely to see it  has increased substantially.

Now … it may be that Amazon is just investing ahead of sales.  Real estate is notoriously “lumpy”.  You can’t add space gradually as sales grow.  You need to build large blocks of space ahead of growth.

This is, though, all a bit disappointing to those who think the on-line sales model can be supported by an asset-lite infrastructure.  It seems that a lot of space is needed to offer next-day-delivery for all those books and electronics gear. 

Irony of ironies: I’m wondering if, when Amazon looked for space for its fulfillment centers, it looked at some of the large empty spaces showing up in shopping malls as a result of people shopping on-line.

I remember the Amazon TV commercial from a few years ago .. the one with the guys measuring various big buildings … like, if I recall correctly, the Roman Colosseum and domed stadiums … to see if they were big enough to hold the “Amazon store”.  Seems it was closer to the truth than we thought.

FY ending: 2007 2008 2009 % increase 2007 to 2009
Revenue $ 14.8 B $ 19.1 B $ 24.5 B 64%
Sq Ft – “Fulfillment and warehouse operations” 13.6 M 17.3 M 17.6 M 29%
Sq Ft – all 15.8 M 19.7 M 20.3 M 29%
Fixed Assets $ 543 M $ 854 M $ 1,290 M 137%
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