Amazon has been one of the biggest names synonymous with how the consumer masses are experiencing life under lockdown: its site lets you buy anything from soup to nuts, from books to baking pans for all your sourdough; and via its streaming services, it gives you many ways stay entertained. But it can also be a source of major frustration, when you find yourself unable to book slots for deliveries, or are facing an army of sellers trying to price gouge you for hot items like masks or toilet paper.
Today, the company reported first quarter earnings that bore out the first of these in spades, but at a cost to profitability as it works to serve a public under a whole new set of challenging conditions.
The company reported net sales of $75.5 billion, up 26% on a year ago, a huge boost on the $59.7 billion it made in net sales in the first quarter a year ago. $41 billion of the sum was attributable to product sales and $33 billion to services (which includes AWS, but also streaming and other non-physical goods).
But earnings per share took a hit, with basic EPS at $5.09 and diluted EPS at $5.01, and net income declining down to $2.535 billion versus $3.561 billion a year ago.
Operating income was also down to $4 billion versus operating income of $4.4 billion in the same quarter a year ago.
On top of all this, the company provided guidance that indicated that it could swing into an operating loss in Q2. It said it expected net sales of between $75.0 billion and $81.0 billion, or to grow between 18% and 28% compared with second quarter 2019 (but largely flat with this quarter). But operating income is expected to be between negative $1.5 billion and $1.5 billion, versus with $3.1 billion a year ago. “This guidance assumes approximately $4.0 billion of costs related to COVID-19,” the company said.
The results sent Amazon’s stock nearly 5% in after-hours trading.
Jeff Bezos, Amazon’s colourful founder and CEO, acknowledged the challenges even the mighty Amazon is facing, but also reiterated, similar to Q2 guidance, that the company plans to double down on spending to face up to serving people during the COVID-19 pandemic, whatever it might bring. It’s a long statement (in what is a very, very wordy press release overall):
“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,” he said in a statement. “We are inspired by all the essential workers we see doing their jobs — nurses and doctors, grocery store cashiers, police officers, and our own extraordinary frontline employees. The service we provide has never been more critical, and the people doing the frontline work — our employees and all the contractors throughout our supply chain — are counting on us to keep them safe as they do that work. We’re not going to let them down. Providing for customers and protecting employees as this crisis continues for more months is going to take skill, humility, invention, and money. If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small.
“Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. 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.”
Of note: Amazon Web Services accounted for $10.2 billion in sales, up 33% on the same quarter a year ago. North America accounted for about $44 billion of the company’s net sales, versus $19 billion for the international segment.
And while services are not quite yet overtaking product sales, the company is seeing its services revenues are growing much faster, at 33% versus 22%. Services include not just video streaming, but grocery delivery and other non-physical paid products that Amazon provides.
At a time when we’ve seen tens of thousands of people laid off across the technology sector, Amazon has been one of the few companies to hire, specifically to staff up with 100,000 extra workers across warehouses and its logistics network to meet surging demand from buyers. That has not always been smooth sailing however, with accusations of poor and potentially health-threatening working conditions.
This has been a thorny issue for the company, so it’s no surprise that in its earnings report, it prominently reminded investors that it has made “over 150 significant process changes in our operations network and Whole Foods Market stores to help teams stay healthy — and we conduct daily audits of the measures we’ve put into place.”
It also noted that it has procured 100 million face masks (presumably not on Amazon itself, where economical ones have been very hard to find) and are requiring that they be worn by all associates, drivers, and support staff in our operations network. “We purchased more than 1,000 thermal cameras and 31,000 thermometers, which we are using to conduct mandatory daily temperature checks for employees and support staff throughout our operations sites and Whole Foods Market stores,” it noted.
Those thermal cameras have also, however, been a point of contention: Reuters this week reported that those cameras were sourced from Dahua, a Chinese company currently blacklisted by the US government.
More to come.