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Amazon Reels in $6 Billion in Net Profits Despite Covid, Logistics Costs

One quarter after seeing profits best $5 billion for the first time, Amazon outpaced itself again in the third quarter to the tune of $6.3 billion in total net income, a 197 percent jump. The retail and logistics giant continues to break its own records in profits despite adding more capacity in its fulfillment and transportation infrastructure and spending $2.5 billion in the quarter for Covid-related measures.

In total, Amazon has spent more than $7.5 billion in pandemic-related costs throughout 2020, with the company expecting to spend $4 billion more throughout the holiday season, Brian Olsavsky, Amazon’s chief financial officer, said in an earnings call. These expenses include procuring personal protective equipment (PPE) for employees, enhanced cleaning of its facilities and wage increases.

In a Nutshell: Earlier this week, Amazon announced it would hire 100,000 seasonal employees, only a month after adding 100,000 full-time and part-time employees across its warehouses and fulfillment centers.

Shipping costs again broke records for Amazon, which has sought to be the go-to spot for consumers afraid to return to stores. These expenses jumped 57 percent for the second quarter in a row to more than $15 billion for the first time.

Amazon expects to grow its fulfillment and logistics network square footage by approximately 50 percent this year, which includes significant additions to fulfillment centers and transportation facilities. The majority of those buildings opened late in the third quarter and into the final quarter, while half of the square footage growth will be on the transportation side, with the opening of more sort centers and delivery centers, Olsavsky said.

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“We did expect to build out our logistics capacity a lot this year especially as we had been rolling out one-day delivery in the middle of last year. That was setting us up for a big build this year,” Olsavsky said during the call. “So we pulled forward a bit from 2021 into this year to satisfy the demand. I think the logistics team is really good in one way at locking up long-term commitments of space and buildings. But on the other hand, being able to adjust the timeline in or out to match capacity demand. I think at this point, we are not trying to cut it close and erring on the side of having too much capacity.”

Overall, capital expenditures and finance leases totaled $12 billion in the quarter, with total expenditures reaching nearly $30 billion for the year so far. Olsavsky noted that Amazon is presently spending half of these capital expenditures on expanding transportation, and will continue expanding specifically in this area for a multi-year period.

Although Prime Day results aren’t included in the second quarter, which ended Sept. 30, Amazon indicated in the earnings report that its third-party sellers—most of which are small- and medium-sized businesses—surpassed $3.5 billion in sales throughout the event—a nearly 60 percent year-over-year increase. Amazon said in September that it was on track to invest $18 billion in SMBs through various forms of assistance in logistics, services, programs, customer support and Prime Day assistance.

Amazon estimated that its Prime members saved more than $1.4 billion during the two-day event due to deep discounts and deals.

Despite recent policy changes by the Indian government to mandate government access to online companies’ source codes and algorithms, both of which have given Amazon advantages in delivering product recommendations and optimizing delivery routes, Amazon is making major moves in the country.

In the quarter, Amazon expanded its operations network in India with 10 new fulfillment centers, five new sortation centers, nearly 200 delivery stations and over 100,000 seasonal jobs to help meet customer demand.

Guidance ahead of the holiday season is even larger than analyst estimates of $112.3 billion, with Amazon showing a fourth quarter range between $112 billion and $121 billion, which would represent growth of 28 percent to 38 percent from a year earlier.

Free cash flow increased to $29.5 billion for the trailing twelve months, compared with $23.5 billion for the trailing 12 months ended Sept. 30, 2019. Operating cash flow increased 56 percent to $55.3 billion for the trailing 12 months, compared with $35.3 billion for the trailing period.

Net Sales: Net sales increased 37 percent to $96.1 billion in the third quarter, compared with $70 billion in third quarter 2019. Excluding the $691 million favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 36 percent.

The net sales total still managed to beat the estimates of analysts surveyed by Refinitiv, who expected $92.7 billion in sales.

Third-party sales jumped 55 percent—the biggest increase across all segments and the third straight quarter with 53 percent growth or more—to $20.4 billion from $13.2 billion in the year-ago period. First-party sales brought in the highest total sales at $48.4 billion, 38 percent ahead of the third quarter in 2019.

Amazon’s cloud computing unit, Amazon Web Services (AWS), generated sales of $11.6 billion for the quarter, up 29 percent year over year and in line with analysts’ estimates, according to FactSet.

The company’s “other” category, which is primarily comprised of its advertising business, saw revenue of $5.4 billion, up 51 percent year over year. Subscription services, which includes revenue from Prime memberships, climbed 33 percent year over year to $6.6 billion.

It’s notable that even though Amazon’s stores were reopened by the start of the quarter, bolstered by the 487-store essential Whole Foods grocery chain, the company’s physical stores segment saw double-digit sales declines for the second straight quarter. In the period, stores saw a 10 percent decline in sales to $3.8 billion, a quarter after seeing a 13 percent decline in this segment.

Net Earnings: Third quarter net income for the e-commerce giant increased to $6.3 billion, or $12.37 per diluted share, compared with net income of $2.1 billion, or $4.23 per diluted share, in the year-ago quarter. The earnings per share for the quarter far exceeded the $7.41 per share expected by the Refinitiv survey.

Operating income exceeded the top end of Amazon’s guidance range, increasing to $6.2 billion in the quarter, compared with operating income of $3.2 billion last year. Of the $6.2 billion, $3.54 billion came from AWS, which has remained Amazon’s greatest profit driver despite the segment’s slowed growth. AWS operating profit topped FactSet analysts’ estimates of $3.45 billion.

For the fourth quarter, operating income is expected to be between $1 billion and $4.5 billion, compared with $3.9 billion in the same period in 2019.

CEO’s Take: In a statement, Jeff Bezos called on more retailers to match Amazon’s $15 per hour minimum wage, which the company increased for all full-time, part-time, temporary and seasonal employees across the U.S. in 2018. The company temporarily raised minimum wages to $17 at the start of the pandemic before scrapping it again in June.

“Best Buy and Target have stepped up, and we hope other large employers will also make the jump to $15. Now would be a great time. Offering jobs with industry-leading pay and great healthcare, including to entry-level and front-line employees, is even more meaningful in a time like this, and we’re proud to have created over 400,000 jobs this year alone. We’re seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season. Big thank you to our employees and selling partners around the world who’ve been busy getting ready to deliver for customers this holiday,” he said.