Amazon's Q3, Q4 outlook: How a free shipping threshold ups the profit ante

Amazon's Q3, Q4 outlook: How a free shipping threshold ups the profit ante

Summary: Amazon's move to increase its free shipping threshold had analysts dreaming of higher gross profits. Rest assured those profit will be reinvested somewhere else.

TOPICS: E-Commerce, Amazon

Amazon raised its free shipping threshold from $25 to $35 and added an interesting wrinkle to what appeared to be a rather ho-hum quarter.

Earlier this week, Amazon bumped up its free shipping threshold and analysts scurried to figure out the profit impact. Perhaps Amazon was getting more serious about its retail profit (really?!?). Maybe Amazon was just adding an incentive to get customers to bump up their carts with more items. Or Amazon is just trying to prod you to subscribe to Amazon Prime.

amazon shipping free


No matter how you slice it the free shipping threshold will have an impact on Amazon's fourth quarter outlook. Consider:

  1. Wells Fargo analyst Matt Nemer said that the new shipping threshold could add $400 million to $1.15 billion to gross profit in 2014. Nemer said that boosting retail profit could turn up in the bottom line. The alternative is that Amazon uses the profits to invest in the grocery business, emerging markets or AWS. My money is that any gross profit bump will be reinvested.
  2. One alternative is that customers add a few more items to carts to snag free shipping.
  3. Amazon Prime subscriptions are likely to go up with the new threshold. Piper Jaffray analyst Gene Munster said in a research note:

We believe the change to the Free Shipping minimum purchase will push more users to Prime. An increase in total Prime users should have a positive impact on revenue growth given we estimate Prime users spend 3-6x more than non-Prime customers. The reason for this increased buying is that, along with the convenience, Prime users see the $79/year as an investment in Amazon, and often times go to Amazon first when they shop online.

Rest assured that the shipping threshold and talk of margins will dominate the earnings conference call. You can also bet that Amazon execs aren't going to cough up much information.

Wall Street is expecting Amazon to report a third quarter loss of 10 cents a share on revenue of $16.76 billion. For the fourth quarter, Wall Street expects Amazon to report a profit of 72 cents a share on revenue of $25.89 billion.

Other key items to watch are:

  • Will Amazon continue to invest heavily? Of course. However, BCG analyst Colin Gillis noted that revenue per employee in the June quarter fell to $162,000 down from $186,000 a year ago.
  • Analysts expect a coin flip over whether Amazon will beat estimates. Revenue could also fall short.
  • What are the comments about Kindle demand.
  • And any comments on AWS would be helpful, but further color is highly unlikely.

Topics: E-Commerce, Amazon

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  • Seems like a complex decision.

    The change is a small one, but it instantly reduces incentive to purchase items costing less than $35 from Amazon.

    Amazon is surrounded by hungry competitors. Many are accepting tiny margins to claw higher in the on-line market. Several big name retailers provide zero-cost shipping to pick-up at their stores (or have delivered to door). Amazon's pricing change offers them a new opportunity.

    Amazon is smart and has the data to adapt quickly if their new strategy goes wrong. ... Fun to watch.
  • Prime

    I have been on Amazon Prime since I bought the original Kindle Fire - it's been worth every penny! It pays for itself just on the shipping I save on Christmas shopping - the shipping the rest of the year is just gravy. And that doesn't even include the video streaming (getting competitive with Netflix) and the Kindle lending library.
  • No big deal.

    I have shopped Amazon for many years, purchasing hundreds of items over that time. Until very recently, I have never had to pay shipping on an Amazon item because I always have items "saved for later" in my cart which I want but in no particular hurry, so if I want something under $25 (or $35), I just add one of these items to it. I've never been in such a hurry to get something that I could justify the cost of Prime.

    Twice in the last couple of months I needed something fast, one of which was a Fire needed for testing an app I had written. Amazon offered a special price on Prime with the Fire so I got it. It is nice not having to worry about shipping, but I still wouldn't pay for Prime again.

    Also, the $35 threshold doesn't seem that bad when you consider that Wal-Mart Online's threshold is $50.
  • Prime

    I originally signed up for Amazon prime to avoid USPS shipping. USPS does not ship to houses in my area. Anything shipped to me USPS gets shipped to town, sent away to several other places, comes back to town again doesn't get delivered and is sent away again. This cycle repeats for months before the item just disappears from tracking. It never gets delivered or returned to the shipper which makes getting a refund difficult at times. I bought a movie from Best Buy in February, they shipped it USPS, after 7 trips to town I finally, in May, stood in the lobby of the local post office, demanding my package which according the 3 pages of tracking was there, only to be told by the clerk that if my package got frequent flier miles I could fly anywhere in the world. I was also told to leave as I was holding up the line but the nine people behind me started chanting "Give him his package!" so the lady went to the back of the PO, got my package and gave it to me. It took her 4 minutes. She complained that delivering mail wasn't her job and demanded an apology from me for suggesting she wasn't doing her job, something I never said. So I use Prime because USPS doesn't ship next day air to my state.

    I could accomplish the same thing by paying for next day shipping on each order but Prime ends up being so much cheaper and allows me to buy small orders and avoid our governments mismanaged mail system. Of course never say that to a Postal employee. They will insist they are an independent company and not part of the government. I asked the last one to tell me that how many other companies; had their CEO appointed by the President, employees that could be charged with a federal offense for tampering with the products they handled and drove vehicles with government license plates but only got the same response, "We are not part of the government". She was the supervisor at the main Post Office.

    However the topic was free shipping. I think Amazon considers their efforts to establish themselves successful and is just cashing in a bit. I would be interested in hearing how 3rd party sellers on Amazon feel about the free shipping since each seller determines how much they charge for shipping.