Amazon earnings weighed down by falling sales and high costs

Amazon recorded its slowest-ever revenue growth in the first quarter amid a drop in online retail sales and heavy costs, and said its aggressive push to expand during the coronavirus pandemic had left it overstaffed and with excess capacity.

Sales at Amazon’s online stores segment came in at $51.1bn in the January-March period, down from $52.9bn in the same period last year.

Operating income of $3.7bn in the first quarter, compared with $8.9bn last year, fell short of analysts’ expectations of $5.3bn. The company recorded overall revenue of $116.4bn for the quarter, 7 per cent higher than last year. For the current quarter, Amazon forecast similarly low revenue growth of between 3 per cent and 7 per cent.

The results sent the company’s shares down as much as 10 per cent in after-hours trading on Thursday.

The worse than expected performance came as the company grappled with supply chain issues, elevated staffing costs and inflation.

Overall, the company recorded a $3.8bn net loss in the quarter, including a $7.6bn loss in relation to the value of its stake in electric vehicle maker Rivian.

Line chart of Year-on-year sales growth for Amazon's Online Stores segment (%) showing Post-pandemic comedown

“The pandemic and subsequent war in Ukraine have brought unusual growth and challenges,” said Andy Jassy, ​​Amazon’s chief executive, but he added that delivery speeds and consistency were “approaching levels not seen since the months immediately preceding the pandemic in early 2020”.

Amazon’s chief financial officer Brian Olsavsky told reporters the company was pulling back on the aggressive expansion in warehousing space during the pandemic, suggesting it had overextended on adding capacity.

“The amount of space we’re going to add in 2022 is much lower than 2021 and 2020 from a space standpoint, and we’re even challenging a lot of that,” he said. “But you make commitments on warehouses, 12, 18 months in advance — so it’s hard to turn that on a dime.”

In contrast to its unprecedented recruitment drive during the pandemic, Olsavsky said Amazon now considered itself “overstaffed”, resulting in $2bn in additional costs created by lower rates of productivity during the quarter. The company had a peak of 1.7mn employees during the quarter, which has since been reduced to 1.6mn.

Despite the rapidly rising operating costs in its ecommerce business, Amazon’s balance sheet had been proposed up this year by strong cloud computing growth.

In the first quarter, Amazon Web Services’ revenue was $18.4bn, up 37 per cent on last year. Operating income in the cloud division was $6.5bn, compared with a $2.8bn loss for Amazon’s retail business in the US and internationally. Cloud revenues beat analysts’ expectations of $18.27bn, according to data from FactSet.

“Amazon’s results show that it is not immune to the macroeconomic slowdown effecting the rest of retail and ecommerce,” said Guru Hariharan, chief executive of CommerceIQ, an ecommerce management platform.

“As inflation and cost increases persist, shoppers are pulling back on purchasing, especially discretionary purchasing, which is disproportionately ecommerce.”

Amazon has sought to alleviate the cost of inflation by announcing an increase to the cost of its cornerstone Prime membership scheme — from $119 to $139 per year — and adding a 5 per cent fuel surcharge to deliveries fulfilled by its own logistics network

This year, the company said elevated staffing costs due to retention issues and a highly competitive labor market, as well as supply chain challenges, would mean slower growth in 2022 compared with the blockbuster pandemic-fueled increases in 2020 and 2021.

Olsavsky said the company felt it was through the worst of those challenges, and was in a position to start dialing back some of the incentives offered to new staff, such as $1,000 signing bonuses. “Generally across the network that has receded,” he said.

Meanwhile, the company faces a growing unionization push at its facilities. This month, workers voted to form the first union at a US Amazon facility in Staten Island, New York, while polling at a second, smaller facility has begun this week. The outcome of a third vote, in Bessemer, Alabama, is pending a decision on the validity of challenged ballots.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button