Amazon: Beyond the Headlines
The first-quarter earnings season has given us some insight into how companies are adapting to the new environment.
According to Amazon.com, Inc. (AMZN) CEO, Jeff Bezos, companies have three choices on how they can respond to the coronavirus pandemic and subsequent economic turmoil. Bezos illustrated these three choices when he quoted Dr. Seuss in a letter to shareholders in mid-April:
“When something bad happens, you have three choices. You can either let it define you, let it destroy you, or you can let it strengthen you.”
No surprise, Bezos chooses the latter.
As you know, Amazon is an online retail behemoth offering everything from its founding product, books, to groceries, electronics, clothing, and even essentials like toilet paper. The company also provides entertainment options through Prime Video and Fire TV.
As “stay-at-home” orders spread around the world, Amazon’s online orders have surged.
Amazon hired 175,000 workers in the U.S. in order to keep up with demand. The company also boosted its capacity to deliver groceries by 60%, and in-store pick-ups at Whole Foods nearly doubled.
Now, you’d think that soaring orders were good for business—and don’t get me wrong, it is! However, Amazon had to make several strategic changes to its operations to fulfill orders in a timely manner, as well as maintain the health and safety of its employees.
Along with hiring 175,000 additional employees, Amazon temporarily suspended its third-party shipping program, delayed the fulfillment of nonessential items, discontinued paid search advertising on Google, eliminated Mother’s Day and Father’s Day promotions, and rescheduled July’s Prime Day. In addition, the company has purchased more than 31,000 thermometers, 1,000 thermal cameras and 100 million face masks, as well as increased sanitation efforts at its facilities and gave raises to hourly employees in the U.S., Canada, U.K., and Europe.
And guess what? All that costs money.
As a result, Amazon’s first-quarter operating earnings fell short of analysts’ projections. Operating earnings slipped to $4.0 billion in the first quarter, down from $4.4 billion in the first quarter of 2019. Net income also dropped to $2.5 billion, or $5.01 per share, compared to $3.6 billion, or $7.09 per share, in the same quarter a year ago. Analysts were expecting $6.25 per share.
The bright spot in Amazon’s first-quarter earnings report was sales. First-quarter sales soared 26% year-over-year to $75.5 billion, up from $59.7 billion in the first quarter of 2019.
In the earnings report Bezos stated, “From online shopping to AWS to Prime Video and Fire TV, the current crisis is demonstrating the adaptability and durability of Amazon’s business as never before, but it’s also the hardest time we’ve ever faced.”
Increased costs are expected to eliminate the Company’s operating income in the second quarter.
Consensus estimate had previously forecast $4.0 billion in operating income for the second quarter. So, you might be wondering where that $4.0 billion is going.
Simply put, Amazon plans to spend about $4.0 billion in response to the coronavirus pandemic.
Amazon plans to spend about $300 million to develop COVID-19 testing capabilities to better protect its employees. Ultimately, Amazon CFO Brian Olsavasky expects the company will spend a total of $1.0 billion for COVID-19 testing in 2020. The company has already constructed a lab and started testing many of its front-line employees.
They are increasing wages, ramping spending on sanitation and cleaning, buying personal protective equipment for employees, and improving their delivery network to once again meet one- to two-day shipping times.
Clearly, Amazon understands the age-old adage, “You have to spend money to make money.” But this might fall under a new adage: “You have to spend money to continue to be in business.”
So, while Amazon’s bottom line will take a hit in the second quarter (and 2020 overall), the company is taking the necessary steps in this new environment.
When reviewing the quarterly reports of companies we also review how each company expects this crisis to change their business, and this is invaluable information—information needed to assess the changed outlook for each company, and how it affects our decisions on what to own.
Everyone’s long-term financial goals are different. At Nicollet Investment Management, we consider the whole picture—your future and long-term goals, as well as a stock’s long-term potential—when building your personal portfolio.
Contact Nicollet to learn more about how we work with our clients.