The Real Deal National

Amazon’s got cash to burn, and real estate is its tinder

The quarterly earnings report disappointed analysts but indicated the e-commerce giant plans to sustain its spending
By Erin Hudson | July 26, 2019 04:55PM

Amazon CEO Jeff Bezos (Credit: Getty Images)

Amazon CEO Jeff Bezos (Credit: Getty Images)

Amazon’s officially on a spending spree.

After a big week of movement in the world of real estate that included shopping for 1 million square feet of warehouse space in Brooklyn, scoping out the We Company’s historic Lord & Taylor building for office workers , and launching a new partnership with Realogy, the e-Commerce giant’s second quarter earnings report confirmed that the company has cash to burn, stock price be damned.

Thursday’s earnings report marks the first time since Q2 2018 that Amazon hasn’t brought in record-setting quarterly profits. This quarter’s profit rose to $2.6 billion, or $5.22 per share. That’s compared to the same time last year when the company reported a quarterly profit of $2.5 billion, or $5.07 per share. That was a huge increase from a profit of $197 million, or $0.40 per share in Q2 of 2017.

Though Amazon foreshadowed the lower-than-expected numbers, analysts still expected the e-tailer’s earnings to come in $600 million higher at $5.56 per share. Amazon’s shares fell immediately after the release of the earnings report.

Brian Olsavsky, Amazon’s chief financial officer, said the results were due to increased spending on building out the company’s capacity for widespread one-day delivery service and noted that the spending spree is only going to increase.

“We saw some additional transition costs in our warehouses. We saw some lower productivity as we were expanding rather quickly,” Olsavsky said on the call. “We also saw some costs were moving — buying more inventory and moving inventory around in our network to have it be closer to customers.”

“It does create a shock to the system,” he continued. “We’re working through that now. We expect we’ll be working through that for a number of quarters, but when the dust settles, we will regain our cost efficiency over time.”

In the first quarter’s earnings call, Olsavsky had said spending associated with the one-day delivery expansion in Q2 would be around $800 million. In Thursday’s call, he said the company had exceeded that.

When it comes to Amazon’s expansion of one-day delivery, Jack O’Leary, a senior analyst at Edge by Ascential, says real estate is “the underlying track that it all runs on” and the company needs more space. He described Amazon’s strategy when it came to real estate as a “steady trend” of “even-keeled aggressiveness.”

Based on Thursday’s report, quarterly expenses related to property and equipment fell to just over $11 billion, compared to $11.3 billion in Q2 last year.

Though the announcement of the lead-generation partnership “TurnKey” boosted Realogy’s stock performance, it wasn’t discussed during Amazon’s earnings call.