Amazon surpassed Wall Street estimates in generating $75.5 billion in net sales for the first quarter as the company predictably drew in significant coronavirus-driven spending. While the e-commerce giant benefited from the number of shoppers stocking up on essentials in March, CEO Jeff Bezos sent a clear message: The company plans to spend at least $4 billion—virtually all of its forecasted second-quarter operating profit—on COVID-19-related safety measures.
In a Nutshell: The jump in revenue―and the company’s 30 percent drop in net income―is no surprise for Amazon given the company’s continued combination of high product demand and aggressive spending efforts, with shipping costs skyrocketing a sizeable 49 percent to $10.9 billion.
While most retailers were shutting down stores and conducting furloughs and layoffs amid the COVID-19 pandemic, Amazon saw increased demand, hiring 175,000 new workers across its fulfillment centers and delivery networks to meet broader consumer needs as more customers shopped online due to stay-at-home guidelines.
The hiring increase was a massive expense on its own, with Amazon saying it expected to invest more than $500 million in payroll increases upon increasing employee wages by $2 per hour and doubling overtime hourly base pay.
After initially banning third-party sellers from shipping “non-essential” items to the company, Amazon reversed the decision in mid-April, but enacted limits on how much inventory could be sent in order to keep room in the warehouse for essential goods.
Much of Amazon’s earnings report focused on the company’s COVID-19 response, such as addressing how it is helping employees stay safe with measures like procuring 100 million face masks. The company is leveraging cloud services platform Amazon Web Services (AWS) to help healthcare workers, medical researchers, scientists and public health officials working to understand and fight COVID-19 by providing a centralized repository of curated, up-to-date, pre-processed and publicly readable datasets focused on the spread and characteristics of the virus.
Net sales: Amazon increased net sales 26 percent to $75.5 billion in the first quarter, compared with $59.7 billion in the prior-year period. Excluding the $387 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 27 percent. Net revenues beat Bloomberg-compiled consensus estimates of $73.74 billion.
More than $10.2 billion of the company’s net sales comes from AWS, which serves as Amazon’s chief profit driver. AWS cracked the $10 billion mark in revenue for the first time in its history, driving 33 percent year-over-year growth.
Net sales for the second quarter are now expected to total between $75.0 billion and $81.0 billion, growing between 18 percent and 28 percent year over year.
Earnings: Amazon saw first-quarter net income fall 30 percent to $2.5 billion, or $5.01 per share, from $3.6 billion, or $7.09 per share, the year prior. The earnings fell far below the $6.27 per share estimated by Wall Street analysts, leading Amazon stock to fall nearly 5 percent in after-hours trading.
That profitability pressure is likely to increase in the current quarter based on the expected $4 billion in spending to protect both workers and consumers from COVID-19 exposure. Unlike most major corporations, Amazon did reveal its profit guidance for the second quarter, anticipating a range between an operating loss of $1.5 billion to an operating income of $1.5 billion. That compares to its operating income of $3.1 billion during the same quarter last year.
CEO’s Take: Bezos said shareholders “may want to take a seat,” indicating that the e-commerce giant is very much thinking about the big picture related to COVID-19, regardless of potential incoming revenues for the quarter ahead.
Given that Amazon was under serious scrutiny in the wake of the termination of a management assistant that organized a walkout at the company’s Staten Island distribution center due to concerns about workplace safety, it makes sense that Bezos and company would push hard to invest more in the health of its employees going forward.
“Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit,” Bezos said. “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. This includes investments in personal protective equipment, enhanced cleaning of our facilities, less efficient process paths that better allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop our own COVID-19 testing capabilities. There is a lot of uncertainty in the world right now, and the best investment we can make is in the safety and well-being of our hundreds of thousands of employees. I’m confident that our long-term oriented shareowners will understand and embrace our approach, and that in fact they would expect no less.”