No e-commerce worries here? Amazon doubles earnings

Updated: Amazon's second quarter earnings doubled from a year ago as sales jumped 41 percent and executives said that the e-tailer may be benefiting from a slowing economy courtesy of its free shipping deals.

On Wednesday, the company reported net income of $158 million, or 37 cents a share, on revenue of $4.06 billion. In the year ago quarter, Amazon reported earnings of $78 million, or 19 cents a share, on revenue of $2.89 billion.

Wall Street was expecting earnings of 26 cents a share. However, Amazon did have a $53 million non-cash gain recognized on the sale of the company's European DVD rental assets. According to the folks at Realmoney.com (a pay site) if you back that gain out Amazon reported an in line quarter. That math would explain why Amazon popped after hours only to reverse sharply. If you're going to back that gain out you might as well note that Amazon is getting a benefit from the weak dollar too.

Nevertheless, Amazon's quarter was a strong one relative to a year ago--and worries about e-commerce sales being thumped in a weakening economy. As for the outlook, Amazon projected third quarter sales between $4.2 billion and $4.42 billion with operating income between $115 million and $160 million (statement).

Meanwhile, comments from Amazon CEO Jeff Bezos noting that a slowing economy is making the e-tailer a better choice than driving 10 miles to a store seemed to allay any of those concerns about one-time gains and gross margins. The chart shows how investors weren't quite sure what to make of Amazon's quarter.

Key points from the conference call:

• CEO Jeff Bezos was mum on metrics for Amazon's developing businesses such as digital media delivery businesses and new efforts such as the Kindle.
• Gross margins were an issue based as analysts asked about whether Amazon was getting more aggressive on pricing--especially in North America where margins in the quarter were 25.7 percent compared to 27 percent a year ago. There's a gulf between margins in North America and abroad. Part of the issue is that there are more third party vendors in North America. On the bright side, international sales are keeping overall gross margins flat.
• Executives said it's too early to tell whether collecting New York State taxes will hamper demand.
• Bezos also talked about consumer confidence and noted that offers like Amazon Prime are in demand as folks want to drive less. Bezos also noted that faster delivery time are making Amazon more of a competitor with local stores. Given the choice between driving 10 miles and clicking consumers could be opting for the e-commerce route, said Bezos. "It's our job to insulate customers. The burden is on us to offer these services in a way that's economical for us," said Bezos.

For the year, Amazon is projecting revenue of $19.35 billion and $20.1 billion, up 30 percent to 35 percent. Operating income was expected to be between $745 million and $920 million. Both of those ranges are higher than Amazon's first quarter outlook for the year.

In a statement, Amazon credited Amazon Prime membership gains and free shipping for helping the company buck tough economic headwinds.

• Amazon spent $272 million on fixed assets including internal software and Website development in the quarter, up 40 percent from a year ago.
• Second quarter inventory was $1.1 billion, up from $1.07 billion in the first quarter. Inventory turns in the quarter was flat from the previous quarter at 13.
• Accounts payable days--how long a company takes to pay its trade creditors--was 58 in the second quarter, up from 53 the prior quarter. The figure has fluctuated between 53 and 62 over last four quarters.
• North American sales in the second quarter were $2.17 billion with international revenue of $1.89 billion compared to $1.6 billion and $1.28 billion, respectively.
• International operating income was $149 million with North American operating income of $96 million. North American sales growth was up 35 percent from a year ago and international sales were up 47 percent.
• Media sales were $2.4 billion, up 31 percent from the year ago quarter, with electronics and general merchandise coming in with revenue of $1.5 billion, up 58 percent.
• Amazon ended the quarter with 18,400 employees.
• "Other" revenue, which includes Amazon Web Services, was $126 million, up 38 percent from a year ago. In the first quarter, Amazon reported "other" revenue of $111 million.