Amazon warns it could make $0 profit this holiday – WWD

Amazon’s sales rose in the third quarter, which is notable after a string of lackluster gains. But the trend reversal wasn’t enough to buoy shares amid a lower-than-expected guidance and disappointing growth in the cloud business.

Buoyed by Prime Day in July, the email giant raised $127.1 billion, up 15 percent for the year. Though it didn’t quite reach the $127.5 billion estimated by analysts, it posted earnings of 28 cents per share, beating the expected 22 cents per share.

However, the holidays will not be as merry as analysts had hoped. Amazon expects net sales to be between $140 billion and $148 billion and growth between 2 percent and 8 percent year over year. This time last year, the company reported 9 percent year-over-year growth. The forecast disappointed analysts who had expected $155 billion.

Uncertainty about the projected operating result also stood out. In its announcement, Amazon said it would drop somewhere “between $0 billion and $4 billion.” In other words, the company posed the possibility of a $0 profit just breaking even, and that sent a tremor through Wall Street. Shares fell more than 20 percent in after-hours trading.

The third quarter benefited from Amazon’s last Prime Day in July, which was its biggest to date, according to the company. The fourth quarter should also see some sort of profit from the new Prime Early Access sale in October. But apparently not enough.

The company blames some of the blame for its negative outlook in a challenging economic climate, a detail that hasn’t escaped pundits.

“Despite some better sales [Amazon’s] The bottom line remains under significant pressure. Operating income fell 48 percent year-on-year, and net income fell 9 percent. Of concern is that operating income is not only lower than a year ago, but fell below third quarter levels in both 2020 and 2019,” said Neil Saunders, Managing Director of GlobalData.

“The decline is reflected in the operating margin number, which has moved from 6.8 percent to 2 percent in just over a year. And with inflation still in place, there is little relief in sight for the final quarter of the year.”

CFO Brian Olsavsky clarified that Amazon is still “bullish” on the holidays but its forecasts are conservative. Efficiency appears to have increased as he explained that items are now in stock and delivered quicker than during the pandemic. Despite this, it operates in a difficult economic environment that is likely to affect sales.

“We, like most companies, are prepared for a potentially slower growth phase,” he said.

Underscoring Amazon’s value and convenience during “these uncertain economic times,” Chief Executive Officer Andy Jassy emphasized that the company is committed to reducing operational costs across its fulfillment network and that it is making “continuous progress.”

Indeed, Amazon struggled to bolster its storage capacity and air hubs as demand surged early in the pandemic, but was faced with operating deeper and more expensive infrastructure while demand flattened.

It’s also working on initiatives to “achieve a stronger cost structure for future business,” he explained, adding that Amazon plans to “balance” and streamline its investments “without jeopardizing our key long-term, strategic bets.”

Amazon’s fortunes don’t depend solely on retail sales, however, and in the past it has often bet on growing its cloud business. But Amazon Web Services reported revenue of $20.54 billion, falling short of analysts’ expectations of $21.2 billion. While that’s still 27.5 percent year-over-year growth, it’s the lowest growth rate in eight years. Operating income of $5.4 billion also disappointed, falling short of an expected $6.37 billion.

“During the third quarter, we saw modest revenue growth in many of our businesses as well as increasing foreign currency headwinds,” continued Olsavsky, and this impact is likely to continue into the holiday quarter.

“As we have done at similar times in our history, we are also taking steps to tighten our belts, including pausing hiring at certain companies and discontinuing products and services where we believe our resources could be better deployed elsewhere are.”

Saunders believes Amazon is entering a new era.

“The reality of a much tougher market, where demand is more subdued and the cost of doing business remains high, is taking its toll on the company…it underscores how much Amazon’s expensive retail operating model is not yet optimized for a slower growth environment. ” he said.

The company appears to be moving away from bold experimentation, Saunders continued, and is taking a more cautious approach. “This is reflected in decisions such as closing underperforming departments, including many of its physical stores. There’s nothing wrong with that approach, and it’s actually a good thing for Amazon to be more disciplined about its performance. However, it arguably reflects an internal view that the operating environment has changed and it is now much more difficult for Amazon to grow both sales and profits,” he added. Amazon warns it could make $0 profit this holiday – WWD

John Verrall

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