Sales grew rapidly for Amazon.com Inc. in the first quarter as cooped-up consumers turned to the leading online retailer for more of their essentials. But profit fell as Amazon spent heavily on fulfillment and expenses related to the coronavirus, and CEO Jeff Bezos warned investors to expect another minimally profitable quarter ahead.
“If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small,” Bezos said in a prepared statement that accompanied Amazon’s earnings report. “Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe.”
Those expenses include spending on protective equipment for employees, cleaning company facilities, less efficient processes designed to keep workers safe, higher wages for hourly employees and investing “hundreds of millions to develop our own COVID-19 testing capabilities,” Bezos said.
Amazon responds to the coronavirus outbreak
While workers at some Amazon facilities have protested that the company has failed to provide sufficient safety equipment, the Amazon earnings released went into detail about the steps the online retailer has taken to protect workers. That includes purchasing 100 million face masks and requiring employees to wear them, as well as acquiring more than 1,000 thermal cameras and 31,000 thermometers to enable mandatory daily temperature checks of employees.
Amazon, No. 1 in the 2020 Digital Commerce 360 Top 1000, said it had hired an additional 175,000 employees in March and April to meet the increased sales spurred by the coronavirus outbreak. It also said it had suspended more than 10,000 sellers on Amazon’s marketplace for price-gouging.
Sales go up sharply in the first quarter
Amazon reported worldwide net revenue of $75.452 billion in the first quarter, an increase of 26.4% from $59.700 billion during the first three months of 2019. North American sales went up 28.8% to $46.127 billion from $35.812 billion.
Amazon Web Services, the company’s highly profitable cloud computing business, had a strong quarter, though Amazon executives said reduced demand from clients in the hospitality and travel sectors limited growth. Revenue went up 32.8% to $10.219 billion from $7.696 billion, and operating income jumped 38.3% to $3.075 billion, accounting for more than 77% of the company’s total operating income of $3.989 billion.
Analysts had predicted Amazon’s sales would go up as many stores closed and shoppers turned to the web to buy groceries and other products.
“Amazon’s huge topline acceleration isn’t a complete surprise amid the pandemic’s shifting consumer spending in favor of ecommerce and online grocery,” says Andrew Lipsman, principal analyst as market research firm eMarketer.
Fulfillment expenses soared 34.1% to $11.531 billion during the first three months of 2020, up from $8.601 billion a year earlier. That helped drag down net income 28.8% to $2.535 billion from $3.561 billion in the first quarter of 2019.
“The bottom-line performance was on the lighter side, but not altogether unexpected in light of the commerce business’s escalating costs of labor and delivery logistics and shift in mix towards less profitable categories like grocery,” Lipsman says. “The fact that the high-margin cloud and advertising businesses—both of which had downside risk—held up well, should help offset elevated costs in the commerce business over the next couple of quarters.”
A note to clients from investment firm Canaccord Genuity said the results point to trends that are positive for Amazon. “”While we expect heightened investments related to COVID-19 to compress margins for the remainder of FY20, the pandemic will likely accelerate several trends benefiting Amazon over the long-term, including ecommerce, cloud computing, and digital advertising,” the note said.
Amazon spent about $1 billion on 1-day shipping in the first quarter, about what it had projected, even though it often had to push out promised delivery dates to four days or longer, chief financial officer Brian Olsavsky told stock analysts on a conference call late Thursday.
He said much of the costs associated with the next-day shipping promise for Prime members Amazon announced last spring were sunk costs, such as the expense of staging inventory closer to cities and building up its delivery network. Olsavsky said it was too soon to tell when Amazon would be able to resume 1-day delivery on most orders.
Amazon Prime is a membership program that costs $119 per year or $12.99 per month, and provides subscribers with free 1-day or even same-day delivery on millions of items on Amazon.com and such other perks as access to streaming TV shows, movies and music.
Olsavsky said Prime members are taking advantage of their benefits more often now that so many are staying at home.
“We see Prime customers shopping more often, larger basket sizes. A lot more use of our video benefits and digital benefits,” he said.
For the second quarter of the year, Amazon projected sales would increase by between 18% and 28% to a range of $75 billion to $81 billion. But the company, which has been steadily profitable in recent years, said its operating income would likely fall between a loss of $1.5 billion and a profit of $1.5 billion. That projection assumes $4 billion in expenses related to COVID-19, Amazon said.
Amazon’s performance in the first quarter, ending March 31, 2020:
- Net sales of $75.452 billion, a 26.4% increase from $59.700 billion in the same quarter in 2019. Net product sales accounted for $41.841 billion, up 22.0% year over year from $34.283 billion. Net service sales hit $33.611 billion, up 32.2% from the prior year’s $25.417 billion.
- North American net sales of $46.127 billion, up 28.8% from $35.812 billion in the first quarter of 2019. North America accounted for about 61.1% of total net sales in the first quarter of 2020, or 70.7% of sales excluding Amazon Web Services.
- International net sales totaling $19.106 billion, up 18.0% from $16.192 billion in the first quarter of 2019. International accounted for about 25.3% of total net sales in the fourth quarter, or 29.3% of sales excluding AWS.
- Amazon Web Services revenue hit $10.219 billion during the quarter, up 32.8% from $7.696 billion a year earlier. AWS sales accounted for 13.5% of consolidated revenue in the first quarter of 2020.
- Other revenue, including Amazon’s rapidly growing advertising business, totaled $3.906 billion, up 43.8% from $2.716 billion in the same period in 2019.
- Revenue from subscriptions, including Prime fees, was $5.556 billion, up 28.0% from $4.342 billion in the same period in 2019.
- Amazon’s operating income declined 9.8% to $3.989 billion from $4.420 billion. AWS earned $3.075 billion in operating income, an increase of 38.3% from $2.223 billion a year ago. Those profit represented more than 77% of the $3.99 billion in consolidated operating income Amazon reported in Q1.
- Net income of $2.535 billion, down 28.8% from $3.561 billion in the same period in 2018.
- Spending on fulfillment increased 34.1% to $11.531 billion, up from $8.601 billion in the same period in 2019.
- Spending on marketing increased 31.8% to $4.828 billion, up from $3.664 billion in the same period a year ago.
- Spending on technology and content increased 17.6% to $9.325 billion, up from $7.927 billion in the same period in 2019.
- General and administrative spending increased 23.8% to $1.452 billion, up from $1.173 billion in the same period in 2019.