Why Amazon Could Miss Estimates

Earnings reports this season have gone from better-than-expected to dismal over the past week. Among the more high-profile misses have been Apple (Nasdaq: AAPL  ) , Chipotle, Netflix (Nasdaq: NFLX  ) , and Zynga, and all four except Apple fell by more than 20%. Restaurants have been hit particularly hard, as it seems that consumers are pinching pennies thanks to the stalling recovery.

In addition to Chipotle's fire sale, Buffalo Wild Wings fell 10%, and McDonald's (NYSE: MCD  ) and Yum! Brands both missed estimates. McDonald's, with 40% of its sales in Europe, took a hit from currency exchange rates as the value of euro has slumped $0.20 below its worth a year ago, putting a 5% dent in its earnings per share. Of the well-known restaurant stocks, only Panera Bread has beaten estimates so far.

Retailers are still a question mark at this point in earnings season; most of them report toward the end of the cycle because their fiscal years tend to conclude at the end of January to make room for the Christmas shopping season. The signs from the restaurant industry and weakness in Europe, however, signal bad news for one retailer set to report today: Amazon.com (Nasdaq: AMZN  ) .

The numbers
Analysts are expecting profits of just $0.02 per share from the online giant as it continues to expand its reach with investments in new warehouses and digital media. Revenue, meanwhile, is predicted to grow 30% to $12.9 billion, and Wall Street has not adjusted its projections despite the negative economic news that's come out over the last few months.

The company made 44% of its sales overseas last year, which could translate into a drop in revenue of 3% to 4% because of a stronger dollar. McDonald's, which brings in about 70% of revenue from abroad, lost 5% in sales due to exchange rates.

In the U.S., discretionary consumer spending also seems to have declined (as the restaurant reports suggest). Retail sales, an important economic indicator, surprised the market by declining in all three months in the second quarter, by 0.3% in April and 0.4% in May and June (excluding auto sales). As one of the country's biggest retailers, Amazon figures to take a hit from the cutback in retail spending.

The reports from Apple and Netflix also seem to send a warning to Amazon shareholders, as the e-tailer competes directly with both companies in digital media. Apple's earnings and revenue came in well short of analyst estimates. The company also sold fewer iPhones than expected. Sales were also particularly slow in Europe, and in the Asia-Pacific region they fell 22%. This weakness could indicate troubles for Amazon internationally, and for its Kindle family of products which competes with Apple's iPad. Sales of Amazon's tablet, the Kindle Fire, have likely fallen off since its introduction last fall as the buzz surrounding the low-price browsing device has faded away and other low-cost competitors have crept into the space.

Netflix, meanwhile, disappointed shareholders by adding fewer subscribers than expected, and said it would struggle to meet subscriber goals for the year. While some might see this as a boon for Amazon, which competes for video-watchers through its a la carte offerings and bundled service through Amazon Prime, it's more likely a sign of consumer spending scaling back in this area. Again, this would bode ill for the Kindle-maker.

Foolish takeaway
With just $0.02 in EPS expected, analysts appear to have set a low bar for Amazon. As indicated by the company's sky-high multiple, Wall Street has long been ignoring earnings, content to allow CEO Jeff Bezos to build out the business and establish competitive advantages. Revenue is what counts here, but that's exactly where companies have been coming up short this season. While two-thirds of reports this quarter have thus far beaten earnings estimates, top-line sales have disappointed. At this point, the market is on track to grow revenue by less than 1% this quarter, and 60% of companies have missed sales estimates so far.

There may be reasons to think a juggernaut like Amazon could buck the trend, especially since its low prices could appeal to cash-strapped consumers, but I'm skeptical the online giant will outperform. With a strong dollar crimping margins, a slowdown in retail sales, and disappointing reports from its peers, all signs seem to be pointing to a top-line miss for the retail powerhouse.

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Fool contributor Jeremy Bowman owns shares of Chipotle Mexican Grill and Apple. The Motley Fool owns shares of McDonald's, Buffalo Wild Wings, Amazon.com, Apple, Netflix, and Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Buffalo Wild Wings, Chipotle Mexican Grill, Amazon.com, Netflix, McDonald's, and Apple. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple and writing covered calls on Buffalo Wild Wings. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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