Amazon Again Posts Record Sales And Profit Amid Rising Pandemic Costs

By Benjamin Romano The Seattle Times

WWR Article Summary (tl;dr) As Benjamin Romano reports, "third-quarter revenue was $96.1 billion, up 37.4% from a year earlier, well ahead of the expectations of the company and Wall Street analysts."

Seattle

Amazon posted record sales and profit for the second consecutive quarter, as it continues to capitalize on a pandemic-driven surge in online shopping.

Heavy spending on hiring, expansion and the costs of operating amid COVID-19 may eat into profitability in the fourth quarter, however, as the company gears up for quarterly sales expected to exceed $100 billion for the first time.

Amazon said Thursday that its third-quarter revenue was $96.1 billion, up 37.4% from a year earlier, well ahead of the expectations of the company and Wall Street analysts. Profit surged 197% to $6.3 billion, or $12.37 a share, also blowing past forecasts.

The company sees no slowdown in the current quarter, which this year included its Prime Day sale, previously held in the third quarter, along with the holiday shopping that typically drives Amazon's annual peak of activity. Amazon executives expect sales in the current quarter of between $112 billion and $121 billion, up 28% to 38%.

Amazon finance chief Brian Olsavsky said costs related to COVID-19 were $2.5 billion during the third quarter, up from the $2 billion the company expected, bringing the total through the first three quarters to more than $7.5 billion. The costs stem from lost productivity due to social distancing requirements, facilities cleaning, hiring and other safety measures.

Amazon has also built its own coronavirus testing system and by November will be able to perform 50,000 tests a day at more than 650 sites. Olsavsky said the company had hoped not to need such measures by now. "But of course the pandemic's still raging and is still very real," he said during a conference call Thursday.

Asked whether the company plans to extend testing beyond Amazon's own work force, Olsavsky said "it's premature to speculate on that." Some 20,000 front-line Amazon employees had confirmed cases of COVID-19 during the pandemic, the company said in September.

Amazon expects another $4 billion in COVID-19 related costs during the current quarter, with the increase due mainly to increased employment — the company added 350,000 employees between July and October — and the continued expansion of its operations network.

That, along with costs from a major increase in new warehouses and transportation facilities, may eat into profitability in the fourth quarter. Operating income is expected to be between $1 billion and $4.5 billion, down from $6.2 billion in the third quarter.

"This year's an election year. We saw some disruption in 2016," Olsavsky said. "There's a whole host of issues that generally come to bear in (the fourth quarter)," such as weather and holiday demand.

COVID-19, he said, "is dwarfing all of those," and causing uncertainty in Amazon's financial forecasts.

Some analysts said the company's projections seemed conservative. Andrew Lipsman, a principal analyst at EMarketer, said Amazon's projections, and rising U.S. COVID-19 infection rates that may depress in-store shopping, are creating an expectation for a blowout holiday quarter for Amazon, and online retail generally, he said.

"We're not seeing growth rates in e-commerce coming down," Lipsman added.

E-commerce accounted for 16.1% of all U.S. retail spending in the second quarter, according to the U.S. Census Bureau's latest update. Online shopping's share of total retail spending increased in the first half of 2020 as much as it did in the prior five years combined.

Amazon shares closed Thursday at $3,211.01, up 1.5%, before the company's financial results were released. Shares lost about 1.9% in after-hours trading.

Amazon Web Services (AWS), the profit-gushing cloud-computing business, saw its sales growth rate slow to 29% during the quarter — the lowest quarterly growth rate since Amazon began reporting AWS sales separately in 2015. The slowing growth rate is in part a function of the business's size.

AWS sales were $11.6 billion last quarter, up more than $2.6 billion from a year earlier, marking the largest quarterly growth in absolute dollars. Olsavsky said customer demand for cloud-computing services has varied this year by industry, with travel and hospitality down; many companies in "a holding pattern"; and many others in areas like video conferencing, gaming and entertainment doing well.

The company is spending heavily to continue expanding its logistics and transportation networks, to the tune of nearly $30 billion in capital expenditures during the first nine months of the year. Logistics capacity is expected to increase 50% this year with new transportation equipment, sortation centers and delivery stations that move orders along their course to customers, as well as fulfillment centers where orders are picked and packed.

That said, Olsavsky acknowledged that the confluence of the pandemic and holiday shopping will strain delivery networks.

"We do think it will be tight on capacity industry-wide, and we're no exception to that," he said.

Olsavsky said Amazon will continue spending next year, specifically on transportation. "That will be the start of probably a multi-year period," he said.

Counteracting the pandemic-related productivity losses is the continuing high demand for online shopping. Olsavsky said Amazon's facilities and delivery routes have been running at or near full capacity since early May, when the company ended its policy of unlimited unpaid leave.

The company has also saved money in some areas due to the pandemic, such as business travel expenses, down nearly $1 billion so far this year, Olsavsky said.

Amazon's operating expenses for the quarter grew 34%, slower than net sales, to nearly $90 billion.

"In periods of strong demand, our efficiencies tend to be better, and we saw that in our operating efficiencies," he said.

Amazon said its global full- and part-time work force, not including contractors or temporary hires, was 1,125,300 at the end of September, a 50% increase from a year earlier.

Material from Bloomberg News is included in this report. ___ Distributed by Tribune Content Agency, LLC.

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