Amazon is a part of almost every household – whether we like it or not. Some houses even rely on Amazon using “Alexa” which can operate modern technological homes with commands. One can order anything from shampoo to a refrigerator with the easy access of their website. Amazon is one of the largest online retailers in the world. Just this past year of 2017, Amazon’s “net sales increased 31% to $177.9 billion” beating their 2016 goal of $136 billion. Throughout this Annual Report Analysis, it will discuss the company’s revenue and expenses as well as their profitability. Next, will discuss their long-term liabilities and how Amazon’s debt-to-equity deteriorated after acquiring a big national food chain. After that, it will go through their statement of cash flow and financial position report. Then, their risks and litigation will be put on the table in terms of how they deduce a risk and what they do to mitigate it. Finally, it will end off with a brief discussion of Amazon’s innovations that are mentioned in their press releases to introduce new ideas – increasing revenue and profit or the overall outlook of their company.
About Amazon and CEO Jeff Bezos
Mid-January,1964, Jeffrey “Jeff” Preston Bezos was born in New Mexico to teen parents whose marriage only lasted a year. Growing up in Houston, Texas, Jeff’s “mechanical talent” was distinct from an early age. After taking apart his crib with a few tools and developing other gadgets into tweenhood, his parents moved Jeff into the garage. Soon after, Bezos converted it into his own personal science lab. Jeff later increased his knowledge of science and working with industrial parts, such as laying pipe, and farm work, like working with cattle. This was encouraged by his grandfather. After Bezos’ family moved to Florida, he discovered his talent and passion with computers. Initially, he wanted to study the field of physics at Princeton University, but instead pursued computer science and electrical engineering. Eventually, he graduated with a Bachelor’s in both of those majors. Bezos’ career started with Wall Street where he applied his computer science knowledge – which was becoming very popular. His big break was when he became a senior vice president at D.E Shaw – a company that “specialized in the application of computer sciences to the stock market” (Jeff Bezos Biography, 2018). While working at D.E Shaw, Jeff met his now current wife, Mackenzie. After Jeff quit the firm in 1994, he moved to Seattle and initiated an online bookstore. This was an excellent start up idea since there were no taxes on mail-order catalogs. This saved Bezos from having to pay taxes on sales. From there, he built his empire from his garage in Seattle and built capital from $1 million given to him from friends and family. After going through many potential domain names, after the initial name of Amazon was “Cadabra” (later decided to be an unfavorable name), Jeff decided on Amazon. He took pride in how the name of his company can be connected through the largest river in the world and the biggest bookstore in the world.
When Amazon started getting bigger, Barnes & Nobles was taking a hit. Competition quickly rose up and the founders let Bezos know that they too were going to now sell their books online They then tried to collaborate with Amazon, but they later declined after contemplation. Soon after, Amazon added clothing from popular clothing brands such as Land’s End and The Gap. Then they opened a sporting goods section leading quickly to Amazon experimenting with different services and products. Once Amazon Prime came around, offering free two-day shipping nationally for only seventy-nine dollars a year, is when things started to kick-off astronomically. Today, Amazon is a multibillionaire company with constant innovations and continues to beat competitors (Jeff Bezos Biography, 2018)
Within the Corporate Governance section of Internal Relations includes a message to shareowners. First off, their letter to their shareholders is a short and to the point overall objectives and principles. This message begins with a short bullet points that says one of Amazon’s largest focus: their customers. The next few points include their goal of making the best and most beneficial long-term investment decisions – both for their shareholders, customers, and themselves. They realistically state that although their “bold investments will pay off”, some might not (Amazon, n.d). Either way, they have the best intentions for everyone involved in their company and will only learn from failed results.
It continues with their “focus on cash” explains that they will always choose optimizing physical cash (cash flows) and not superficial documents such as their accounting reports. This is important because it means that they’re honest with themselves and others while being financially smart for future success. They end off with mentioning their “cost-conscious culture” and their hiring practices. Their cost-conscious point succinctly states their ability to take their “gotta spend money to make money” responsible. They are always finding ways to lower costs of a profit as much as possible. Ending off, their focus on hiring and making sure to hold on to valuable employees with a passion and care for the company. This really enforces their view of their customers being a large importance to their company. With good works and great customer service from dedicated employees, they can maximize their clientele. A company is only as good as those who work there (Amazon, n.d).
Revenue (Net Sales)
According to the annual report of Amazon, it states that Amazon’s sales increased from 2016 to 2017 by 27% to 31%. (Amazon, Inc, 2017). The total amount of net sales is 177,866 million dollars (for 2017). Most of these sales, $108,354 million (60.9%), are gained mainly from their online stores. This amount includes everything available on their site – like physical items, media, digital content, or anything else sold on a “transactional basis” (Amazon, Inc, 2017). Around 31,881 million 17.9% of the sales is from third-party services including third party sellers. Amazon Web Services (AWS) accounts for about 10% of sales. Amazon subscription services including Prime, audiobooks, e-books or anything else customers pay results in 9,721 million 5.5% of sales. In 2017 Amazon added physical stores in which 5,798 million (3.25%) of sales come from here. Their stores enable customers to physically select and purchase items. Even though this number is quite low compared to their other profitable services, there is still ample time for it to grow because it is so new. A remaining three-percent of sales comes from miscellaneous revenue from paid advertising and use of their Amazon customer credit card (Amazon, Inc, 2017).
Expenses (Cost of Sales)
Through analysis, Amazon’s expenses (cost of sales) is mainly comprised of “purchase price of consumer products, digital media content costs where we record revenue gross, including video and music, packaging supplies, sortation and delivery center and related equipment costs, and inbound and outbound shipping costs, including where we are the transportation service provider” (Amazon, Inc, 2017). Amazon’s cost of sales was increased from 2016 to 2017 because of their increased sales. With increased sales, it means there is an increase in the expense of both product and shipping costs (Amazon, Inc, 2017).
Profit Margin Ratio
Amazon’s profit margin ratio for the year end of 2017 is 1.71% (Amazon, Inc, 2017) This is calculated by net income divided by revenue. This is not significant compared to their 2016 margin of 1.74%. This number is important because just looking at revenue numbers will not display a factual and realistic picture of the company’s profitability. When discussing profit margin (or any ratio, for that matter) it is important to compare it to similar industries. For example, Walmart’s profit margin is 2.83% and Target’s is 3.94%. A higher profit margin usually means that the company is more profitable and is in more control of their costs. In addition, it can show how a secure a company is (Profit Margin, 2018) It’s possible that since Amazon is so unique and offers a vast selection of products and services that it is difficult to find a comparable company to compare it to.
As of December 2017, Amazon had $24.3 billion of unsecured senior notes. The reason this number is high is because in August 2017 Amazon bought Whole Foods resulting in an acquired 17 billion dollars in loans. The buying of Amazon also explains why the debt to equity ratio significantly deteriorated. In 2015 Amazon’s debt to equity ratio was 1.31 it improved in 2016 and was 1.06. However, in 2017, it deteriorated significantly to 1.59. Most of the interest on the loan’s debt is to be paid semiannually and in 2018 Amazon must pay 100 million dollars in principal payment for their loans.
In addition to the 24.3 billion dollars, Amazon also has other long-term liabilities. They have a total of $20,975 million in other long-term liabilities. Out of that number $13,183 million are long term capital and finance lease. Because of certain accounting rules some equipment, buildings, and technology infrastructures must be categorized as a lease which is reported as a liability on the financial statements (Amazon, Inc, 2017).
Statement of Cash Flow
A statement of cash flow is a financial statement that displays how changes over time in income and balance sheets can affect cash equivalents and cash. Within it are three parts: operating, investing, and financing activities. There are different ratios that are involved such as cash flow on total assets. To find the cash flow on total assets, cash flow from operations is divided average total assets (these numbers are the average of 5 years) which is 24.73%. The ratio for cash coverage of growth is determined by dividing the operating cash flow by cash outflow for plant assets which is $18,434 by $48,866 resulting in 37.72. A high ratio implies enough in cash to meet the growth of assets. Whereas a low ratio can depict an inadequate level of cash to meet growth of assets. For operating cash flow to sales, the ratio is found by dividing operating cash flow by net sales this equals 10.36% (Amazon, Inc, 2017)
According to Amazon Inc’s balance sheet, everything increased, besides treasury stock and accumulated other comprehensive loss. What appears on the balance sheet is that Amazon has common stocks and treasury stocks. Their treasury stock amount is significant because Amazon bought back their common stock making their remaining outstanding stocks at a larger value. Another part of the assets section of the balance sheet is the accounts receivable. The turnover ratio for 2017, revenue divided by receivables, had deteriorated from 2016 to 2017. So, the ratio went down from 20.73 to 18.35 (Amazon, Inc, 2017). This could indicate that Amazon’s credit policy may be too loose, or they don’t have one. Otherwise, it could mean that Amazon’s is not collecting funds in a timely manner or customers are not financially stable.
Their inventory turnover, which is calculated as cost of goods sold divided by inventory, had deteriorated significantly from 2016 to 2017. Specifically, it went to from 7.70 to 6.98 (Amazon, Inc, 2017). This most likely means that Amazon is holding their inventories longer than other times. In other words, Amazon’s sales could have been a little weaker than previous years. Although, lower inventory turnover does not necessarily mean that Amazon was not making a large profit.
Risks and Litigation
Just like any other company, Amazon faces risks that may or may not happen. Regardless, knowing your weak points as a company may help mitigate those risks. Two risks of the many Amazon faces are their “intense competition” and stress on their key resources during their expansion. Since they are getting bigger, their competition increases. Amazon offers many industries that can be competed with other companies that have “greater resources, longer histories, more customers, and/or greater brand recognition” (Amazon, Inc, 2017). This is a legitimate risk because companies with this amount of upper-hand can adapt strategies like having better pricing, dedicate more time and money into “technology, infrastructure, fulfillment, and marketing” (Amazon, Inc, 2017). Competitive company can also create alliances with other well-known industries resulting in Amazon losing revenue.
Their other risk includes what could happen if they grow too much and their current resources such as their “management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions” will not be able to keep up (Amazon, Inc, 2017). As if, too much of a good thing can be a bad thing. Amazon fears they will not be able to grow “effectively” with the increase of demand from their business.
Legal proceedings are also a risk depending on their outcome. They can cause monetary damages in addition to a negative result for their operations. In certain instances, Amazon can find themselves occasionally involved in claims and litigation. One such occurrence was in August 2013 – Busk v. Integrity Staffing Solutions, Inc. and Amazon.com, Inc. This claim was against Amazon for not paying employees for standing in lengthy, time consuming security checks when leaving work. How it worked at Amazon is when a worker’s shift ended, they clocked out and then had to be checked by an “airport security” like system to make sure nothing was stolen. In result, workers would sometimes wait at least a half hour to be checked. This problem goes against “federal and state wage and hour statues and common law” (Amazon, Inc, 2017). Therefore, complaints were geared towards whether workers should be compensated for the time stood in line. It was argued in by the worker’s lawyers that under the Fair Labor Standards Act, “The legislation requires that workers be paid for ‘integral and indispensable’ activities outside of their regular hours” (O’Connor, 2014). In addition to this claim, they mention that these workers were not making a lot of money to begin with – mostly minimum wage capped at fourteen dollars an hour.
In short, these security checks were only benefitting the employer and were not getting compensated. Since the government did similar security checks with their employees, the judges learned towards Integrity Staffing Solutions Inc. In the end, the district court granted Integrity’s motion to dismiss. And said that under the Fair Labor Standards Act, the security check did not need to be compensated since it is not part of the postliminary activities. In solution to the long security checks, it was suggested to Integrity Staffing Solutions Inc to hire more staff to make the process go quicker.
Press Releases/Newest Innovation
Amazon’s press releases announce new innovations or financial information. One of the articles is about Amazon’s 2017 sale increases. For the full year of 2017, Amazon’s net sales were driven up from $136 billion (2016) to $177.9 billion – a significant 31% increase. Net income showed signs of improvement going from $2.4 billion to $3 billion. However, operating income declined a little by 2%. This brought Amazon down from $4.2 billion to $4.1 billion. CEO, Jeff Bezos, comments that the introduction of Alexa was a positive influence on these numbers. In result, “other companies and developers are accelerating adoption of Alexa” (Amazon – Press Release, 2018).
Another press release is related to revenue. Amazon celebrated hosting the “biggest global shopping event in Amazon history”. Prime members were invited to take part in sales on the company website July 11th, 2017. According to Amazon it “surpassed Black Friday and Cyber Monday” sales (Amazon – Press Release, 2017). What made this sale different than other big sales is that instead of being just 24 hours, it was 30. It was said to have grown more than 60 percent in comparison to their Prime Day in 2016. Sellers on Amazon, especially entrepreneurs and small businesses, benefitted by increased revenue. In addition, Amazon gained new members on July 11th than any another day. Numbers show that “tens of millions of Prime members made a purchase on Prime Day 2017. One of the most popular Amazon product that gained the most revenue was the Echo Dot. It was the best-selling product on Prime Day – both on July 11th and globally. It was a successful day for Amazon, to say the least (Amazon – Press Release, 2017)
In term of innovations, Amazon is always looking for new products and services to introduce into the market. In November 2017, Amazon introduced a service that helps eliminate difficult work from machine learning process – such as “guesswork, heavy lifting, and complexity” (Amazon, AWS, 2018). This service is called Amazon SageMaker. With SageMaker, scientists, developers, and machine learning experts can quickly build, train, and host machine learning models. It takes data that is imputed and offers common algorithms and framework. It then prefers trial and error and then deploys the model. This makes it so much easier for developers because usually they have big teams of people doing this. Now, they can purchase something to do it for them. In result, “tens of thousands of customers” are eager to acquire this machine for their own benefit and purposes (Amazon, AWS, 2018).
After reading through the annual report and doing additional research, Amazon Inc. seems like an integral company. They work so hard on being big and Jeff Bezos leads it himself. Usually, most CEOs stand in the back and work through PR, but Bezos knows the company well and guides it in the right direction. When a CEO is strongly involved in their own company, it makes it more personal. He also put in 10% of his stake in the company so when people invest, they know that the CEO himself trusts his company enough to invest in it themselves. Just by personal experience, buying from them is so easy and issues with orders are resolved quickly and effortlessly. They also take risks meaning they’re always looking for new ways to improve and expand. Although it was just mentioned, I do find it quite interesting how involved the CEO is.
In all, Amazon started out in 1994 and has been doing very well up until this point. Their annual report discusses many topics such as: their revenue, expenses, long-term liabilities, statement of cash flows, their financial position, and risk and litigation. Amazon’s press releases were found on the company investor relations website which helped discuss news in their company as well as their innovations. With all this information studied, they are a big company led well by their CEO with normal financial ups and downs. If they continue to do what they are doing, they will get even bigger than they are now.