Amazon posts 20 percent second quarter sales gain; shipping costs soar 36 percent as one-day delivery ramps, Inc. (NASDAQ: AMZN) late Thursday reported second quarter worldwide net sales of $63.4 billion, a 20 percent increase over the 2018 quarter, while shipping costs hit $8.13 billion, up 36 percent year-over-year, as the Seattle-based e-tailer invested heavily in its transport and logistics infrastructure, especially to ramp up its one-day delivery service for members of its Prime service.

Operating income rose slightly to $3.1 billion, while net income came in at $2.6 billion, or $5.22 per diluted share. That, again, was a slight increase from second quarter 2018 levels. The earnings-per-share numbers came in about 7 cents below the median estimate of 14 analysts polled by Barchart. Shares were off about 1 percent in after-hours trading.

For the third quarter, net sales are projected to range between $66 billion and $70 billion, which would be a 17 percent to 24 percent gain year-on-year, Amazon said. Operating income is expected to be between $2.1 billion and $3.1 billion, compared with $3.7 billion in third-quarter 2018.

The second-quarter net sales figure excluded an $814 million unfavorable impact from year-over-year changes in foreign exchange rates, Amazon said. Fulfillment costs in the quarter rose to nearly $9.3 billion from more than $7.9 billion

In April, Amazon said it would move to free one-day deliveries of millions of products ordered under its Prime service, which reaches more than 60 million U.S. households. The one-day delivery program, which replaced the traditional two-day delivery window, was rolled out across North America June 3 to cover about 10 million products. Because of Amazon’s immense influence in the e-commerce sphere, it is widely believed that one-day delivery will become the new benchmark for online deliveries.

In a statement, Jeff Bezos, Amazon’s founder, chairman, president and CEO, said that customers “are responding to Prime’s move to one-day delivery. We’ve received a lot of positive feedback and seen accelerating sales growth.” 

Amazon CFO Brian Olsavsky said on an analyst call late Thursday that the second-quarter costs of launching the program exceeded the $800 million that was initially projected. Olsavsky wouldn’t comment on the magnitude of the higher expenses, but said Amazon experienced higher warehousing costs and lower productivity as the physical network and employees adjusted to the compressed transit times.

A change like this “creates a shock to the system,” he said. “We will be working through that for a number of quarters.”

Olsavsky would not go into specifics on third-quarter costs associated with the delivery change. Most of the current focus is on deepening the program within North America, he said, adding that the company has begun implementing the program internationally, where a larger proportion of items will be eligible for the one-day service.

Amazon is confident that its network won’t buckle under the avalanche of packages that will be shipped during the upcoming peak season. The one-day commitment was in place during the company’s annual “Prime Day” extravaganza, which ran for two full days in mid-July, and the network held up well, Olsavsky said. About 175 million items were sold across 18 countries, making it the largest two-day sales event in the company’s history. 

“Prime Day was a good test” of the one-day delivery model, he said.

Also during the quarter, FedEx Corp. (NYSE:FDX) said it would not renew its U.S. air express contract with Amazon. Amazon’s U.S. air traffic accounted for a very small part of FedEx’s revenue base. For its part, Amazon is rapidly building out its own air and ground network and is expected to feel little disruption from the FedEx action.