Amazon chief executive Andy Jassy pushed back against the notion that the company's retail business is an afterthought to its cloud and AI operations, telling analysts on the company's third-quarter earnings call that the store business has made more progress than the market gives it credit for.
Amazon reported third-quarter results on October 29. Total revenue rose about 12 percent year over year, with online store net sales growing 2 percent to $68.5 billion and physical store net sales rising at the same rate to $5.7 billion. International segment sales increased 5 percent to $43.1 billion, or 8 percent excluding foreign exchange effects, while AWS revenue climbed 39 percent to $46.0 billion. Operating income jumped to $28.1 billion from $17.4 billion in the same quarter last year, with the North America segment contributing operating income of $8.7 billion. AWS operating profit reached about $17.8 billion, up from $11.4 billion a year earlier, putting its annualized revenue run rate near $184 billion. Earnings of $1.89 per share came in below the consensus estimate of $1.97, and free cash flow turned negative in the quarter, reflecting the pace of capital spending on data centers and AI infrastructure.
Jassy on why retail matters
In stores, I think some folks are sleeping a bit on how much progress that business has made and what it has become in the last few years, Jassy said on the call. I am not aware of another retail business approaching Amazon's revenue size, hundreds of billions of dollars, with double-digit operating margins inclusive of ads, that is growing at this pace.
The executive pointed to fresh groceries and everyday essentials, which he said grew three times faster than the rest of the store business. Customers who shop perishables with same-day delivery purchase nearly seven times more essential units than those who do not, a pattern that Jassy and outside analysts both described as strategically important.
This is an important shift as it allows Amazon to win in a category that offers regularity and repetition, GlobalData Managing Director Neil Saunders said in emailed comments. That, in turn, makes Amazon stickier, makes the fulfillment network more efficient, and improves perceptions around the value of Prime and other services.
Headwinds and investments
Amazon's year-over-year retail comparisons were made tougher by a calendar shift: the company moved Prime Day from the third quarter to the second quarter this year, removing the e-commerce event's sales and advertising boost from the Q3 baseline. Amazon also trimmed its retail workforce earlier this month, cutting hundreds of employees as part of an adjustment the company said would better enable it to deliver on its priorities.
The quarter also spotlighted Amazon's growing bets on AI-assisted shopping. Alexa for Shopping, which expanded its capabilities this week ahead of the holidays, is gaining usage among shoppers, and Jassy told analysts that US customers using the feature are spending 50 percent more per order than those who do not. Though we anticipate working with horizontal agents, we believe Alexa for Shopping is going to be the primary shopping agent customers use to shop Amazon, he said.
Analysts broadly agreed with the framing. Telsey Advisory Group said in a note that Amazon's retail market share could continue to grow as long as it leverages its Prime member base, and that Amazon's ability to fuel key growth opportunities in grocery, pharmacy, logistics, ads, and AI and tech infrastructure should make it more valuable.
The takeaway
The message from the quarter is that Amazon sees its retail operation as a compounding asset rather than a legacy business. Store revenue growth is modest in percentage terms, but it is paired with double-digit operating margins when advertising is included, and the grocery and essentials category gives the company the repeat purchasing behavior that anchors Prime membership. For brands and sellers watching Amazon's strategy, the combination of faster grocery growth, a more active shopping agent, and continued logistics expansion points to a retailer using its store business as the base for a much larger commerce ecosystem, with AWS and advertising profit funding the bets that keep the flywheel turning.
The quarter also frames the tradeoffs Amazon is managing as the AI buildout accelerates. The same AWS engine that is delivering its fastest growth in nearly five years is also absorbing enormous capital expenditure, which is why free cash flow turned negative even as operating income nearly doubled. Jassy's emphasis on the store business reads partly as an argument that Amazon's overall model is not dependent on any single line: cloud profit, advertising margins, and a high-frequency grocery business can support each other through a period of heavy investment. That is the case the company will carry into the holiday quarter, when retail volume, ad revenue, and the performance of Alexa for Shopping will all be tested in the most competitive shopping season of the year.
