Investors had a few good reasons to keep their expectations for eBay's (NASDAQ:EBAY) second-quarter results in check. Its sales growth pace had badly trailed fully integrated e-commerce rivals like Amazon.com (NASDAQ:AMZN) and Walmart (NYSE:WMT), after all. And the online marketplace has announced lower profitability due to the expensive investments management is making in the business.
eBay's recent earnings report didn't change the big-picture narrative that paired market-share challenges with reduced profit margins.
Let's take a closer look.
Reduced growth rates
The pool of active buyers expanded by 4% to mark no improvement over the prior quarter's sluggish pace. Before the past six months, eBay had been growing this core metric at a 5% rate for over a year, but trends have worsened slightly, especially in the U.S. segment.
The slower expansion put pressure on the marketplace's sales volumes, which rose at the slowest rate in nine months in the U.S. market while just holding steady in the international segment. eBay's overall volume ticked up by 7%, compared to 33% sales gains achieved by Amazon and by Walmart's e-commerce segment.
eBay's unit sales slowed for the third straight quarter, too, with the number of product sales holding flat, compared to a 1% uptick in the prior quarter and a 2% increase in the holiday quarter. Overall, these numbers show that the marketplace's growth initiatives, including improvements to product pages and other customer experience upgrades, haven't delivered faster volume gains.
Meanwhile, eBay's transaction fees, its main source of profits, ticked down to 8.1% from 8.2% in the marketplace segment while holding steady at 22.7% in the StubHub division. Expenses were a bigger drag on earnings, though. Sales and marketing costs jumped to 30.6% of sales from 28.9% and product development ate up 11.1% of sales compared to 10.8% in the prior year.
Combined, these cost boosts overwhelmed smaller savings in other areas to push profitability lower as operating margin dropped to 25.2% of sales from 26.4%. That result still kept eBay far more profitable than its integrated retailing peers. Walmart's operating margin was 4.2% last quarter, and Amazon's comparable metric was 2.8%.
In a press release detailing the results, CEO Devin Wenig and his team stressed the fact that eBay made progress along its goals this quarter, including by making it easier to buy and sell products on its platform. "We continued to execute our strategy," executives said, "making improvements to the core eBay experience." The extra spending, meanwhile, was in service of pursuing "significant opportunities" in areas like advertising and payments, Wenig explained.
Investors can look for the core business to speed up in the second half of fiscal 2018, but the gains will be muted. In fact, executives lowered their revenue outlook and now expect sales to rise between 6% and 7%, down from the prior target range of between 7% and 9%. Lower tax expenses imply that profits should stop at between $2.28 per share and $2.32 per share, or a bit higher than the prior forecast range. But eBay is now expecting operating margin to fall to about 27%, the low end of its guidance range, mainly due to extra costs associated with its acquisition of a selling platform in Japan.
These top- and bottom-line targets translate into continued growth for the e-commerce giant, but at a slower pace than the company enjoyed in fiscal 2017. Management had entered the year hoping to achieve another period of accelerating growth, but instead eBay might see steady, or slightly decreasing, sales volume gains.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.