'Order Early,' Urges Amazon CFO, Warning of Holiday Shipping Bottlenecks
Q4 shipping capacity "will be tight" for Amazon's transportation network and the third-party shippers it relies on, said Chief Financial Officer Brian Olsavsky on a Thursday investor call. Amazon has invested “quite a bit in our own capacity," and about half of Amazon's capital expenditure costs are going to expanding transportation, he said. Amazon created 400,000 jobs in 2020 and a lot of employees will be focused on transportation, but “it’s going to be tight for everyone,” he said. “We’ll all be stretched, and it's advantageous to the customer, and probably to the companies, for people to order early this year.”
Net sales in the quarter reached $96.1 billion vs. $70 billion in the 2019 quarter, said the company. Prime member renewal rates improved year on year in Q3, said Olsavsky. Q3 sales results reflect continuing trends coming out of Q2, said the executive, citing strong demand globally across hardlines, consumables, softlines and media.
Amazon “crushed 3Q earnings” with revenue and operating income 4% and 30% above analyst consensus, driven by sustained pandemic-related demand and higher Prime member engagement, Cowen analyst John Blackledge wrote investors Friday. Online stores, Amazon Web Services, subscription and advertising businesses “all performed well.”
Amazon CEO Jeff Bezos said in an earnings release that early holiday shopping trends point to an “unprecedented" holiday season: "We’re seeing more customers than ever shopping early for their holiday gifts." He noted Amazon’s minimum wage increase to $15 for full- and part-time, temporary and seasonal employees in the U.S. and challenged other large employers “to do the same. Best Buy and Target have stepped up,” he said, encouraging other companies to “make the jump to $15.”
Olsavsky tempered enthusiasm for Q4, seeing “a lot of uncertainty around the holiday,” citing costs for fulfillment, potential weather issues, election year impact and “that COVID is dwarfing all of those.” Increased costs for employee safety in fulfillment and logistics operations -- including personal protective equipment, process revisions for social distancing, testing and enhanced cleaning -- added operational costs in the quarter, bringing incremental COVID-related costs in the first three quarters of 2020 to $7.5 billion, he said. Amazon is ramping its in-house testing program with a goal of 50,000 tests a day across 650 sites by November and expects to incur an additional $4 billion in COVID-19-related costs in Q4. Amazon has saved $1 billion in travel costs this year.
Wedbush analyst Michael Pachter said Amazon’s Q4 revenue guidance of $112 billion-$121 billion exceeds prior expectations, but the margin outlook reflects “conservatism around fulfillment and COVID-related costs.” While believing Amazon’s guidance "is sincere, we think it is overly conservative, and we cannot conceive that the company will spend all of its incremental gross profits on fulfillment, marketing and COVID-related expenses," he wrote investors Friday. Shares closed 5.5% lower Friday at $3,036.15.
Barclays analyst Ross Sandler cited "heated debate" in the investment community about which e-commerce companies are likely "to sustain their customers and frequency in 2021." Amazon "should stand out from the pack on that front with the best retention," he wrote investors Friday, noting new Prime members are more engaged and "service levels are broadly better than the competition." Amazon should be in a position to "see some permanent share shift." Third-party seller services revenue continued to grow faster than online stores revenue, increasing to 54% of total unit mix in Q3. A half million sellers have had record sales on Amazon this year, Olsavsky said.