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Investing.com - Shares of MercadoLibre (NASDAQ:MELI) dropped 5% in premarket trading after the Latin American e-commerce company posted second-quarter earnings that fell well short of Wall Street expectations, as a decision to expand free shipping in its key Brazil market weighed on profit margins.
The company reported earnings per share of $10.31, missing the consensus estimate of $12.21.
Revenue rose to $6.79 billion, beating expectations of $6.59 billion.
MercadoLibre has seen rapid growth across its commerce and payments segments, but analysts have flagged that shifts in business mix could be weighing on profitability.
In June, MercadoLibre announced that it would expand free shipping in Brazil to include cheaper items, as part of a bid by the internet group to answer intensifying competition from tech giant Amazon (NASDAQ:AMZN) and Sea’s Shopee, as well as low-cost Chinese players like Temu.
Against this crowded landscape, MercadoLibre has waived shipping fees in Brazil for sales of 19 reais ($3.44) or above. Previously, the threshold stood at a minimum of 79 reais.
MercadoLibre’s head of e-commerce operations in Brazil noted at the time that any financial impact from the alteration to its shipping costs would be eaten by the firm, although the executive did not provide an indication of the expenses MercadoLibre estimates it will incur from the change.
The company had previously announced in late May that it would slash shipping costs in Brazil for companies and individuals selling items on its platform by up to 40%.
Against this backdrop, items sold in Brazil accelerated by 34% in June and 26% for the second quarter. But lower shipping revenues, higher delivery volumes and heavy marketing expenses drove down earnings before interest and tax margin down to 12.2% from 14.3% a year earlier.
Still, analysts at BofA argued that the changes in Brazil will lay the "groundwork for durable growth" at MercadoLibre.
"We suggest moves likely to create a far stronger and highly relevant base of low-average selling price assortments, from which MercadoLibre can add longer-tail categories, appealing to new buyers, sellers and occasions, while reducing oxygen for rivals while further enriching underwriting and marketing insights," the brokerage said in a note.
(Pratyush Thakur contributed reporting.)