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.
No matter how you slice it the free shipping threshold will have an impact on Amazon's fourth quarter outlook. Consider:
- 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.
- One alternative is that customers add a few more items to carts to snag free shipping.
- 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.