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Why Amazon's explanation for shutting down Diapers.com and Quidsi stunned employees

Last week, Amazon announced it was shutting down Diapers.com and the rest of the Quidsi subsidiary, claiming it hadn't been able to turn the business profitable.

But that narrative doesn't exactly mesh with what was said at an all-hands meeting just a few months ago, when Amazon and Quidsi executives told employees that they were confident that Quidsi would indeed be profitable in 2017, several sources in attendance told Recode.

At the meeting in late 2016, executives said Quidsi would also generate significant free cash flow in 2017, which is notable because Amazon CEO Jeff Bezos has long said that he cares more about free cash flow than he does profit margins or profitability metrics such as operating income and net income.

The turn of events has left many of Quidsi 263 employees stunned and has led to much speculation about alternative reasons for Amazon's decision.

One popular theory is that Amazon doesn't want to admit that a business it paid $545 million to acquire in 2011 was never really a strategic fit, since it meant sending customers to sites other than Amazon.com for popular consumer packaged goods items. This key category is the current battleground for a pricing war between Amazon and Walmart that is terrifying big-name brands.

Others believe a more unusual reason, claiming it could be some gamesmanship on the part of Bezos intended to send a message to Wall Street, as well as Walmart leadership, that Quidsi co-founder Marc Lore cannot build profitable businesses. Lore is currently the e-commerce chief in the U.S. for Walmart, which paid $3 billion to buy the startup, Jet.com, that he created after leaving Amazon.

Amazon declined to comment further beyond its initial statement when it made the surprise announcement about Quidsi last week. At the time, its spokeswoman released a statement:

"We have worked extremely hard for the past seven years to get Quidsi to be profitable, and unfortunately we have not been able to do so. Quidsi has great brand expertise and they will continue to offer selection on Amazon.com; the software development team will focus on building technology for AmazonFresh."

Putting aside the fact that Amazon has only owned the business for six years, not seven — the statement is otherwise true. Using generally accepted accounting principles, Quidsi has never generated net income for a full fiscal year since Amazon acquired the company six years ago, sources say.

Quidsi has, however, strung together profitable months over the last two years, sources familiar with the matter told Recode. As far back as 2015, in fact, the company had a party when it turned a monthly profit for the first time.

Quidsi has also shaved tens of millions of dollars in losses off of the business over the past few years, while the statement Amazon made seems to imply little progress.

What's more, many costs that Amazon is currently allocating to the Quidsi business won't disappear when Quidsi shuts down, sources contend. That's because they stem from business functions at Amazon that support the entire retail operation and would be costs for Amazon whether or not Quidsi is in existence. In short, several sources believe Amazon will save little money — by the company's standards — by shutting down the business.

Add to all of this the positive comments from execs at the late 2016 all-hands meeting, and you can understand why Quidsi employees are confused by Amazon's explanation for the decision.

"You don't just shut down a business of this size that's going to be profitable and moving in the right reaction," said one.

Said another: "It's just baffling."

By Jason Del Rey, Re/code.net.

CNBC's parent NBCUniversal is an investor in Recode's parent Vox, and the companies have a content-sharing arrangement.