Even Amazon Is Struggling

Last Thursday, Amazon Inc (NASDAQ: AMZN) reported third-quarter results, missing on the top and bottom lines, while also providing sales guidance for the critical holiday quarter that was below Wall Street's estimates. Shares dropped more than 4% in extended trading as the e-commerce challenge is facing expensive labor costs and supply chain disruptions while coming to terms with a slowdown in growth.

Third-Quarter Results

For the quarter that ended on September 30^th, 2021, earnings amounted to $6.12, below the expected $8.92 per share, according to analysts surveyed by Refinitiv. Net income decreased from $6.3 billion in last year's comparable quarter to $3.2 billion. Moreover, without the hefty profit from AWS, Amazon would have ended the quarter with a loss.

Revenue rose 15% as it amounted to $110.81 billion, below the expected $111.6 billion, according to analysts surveyed by Refinitiv. During the last year's comparable quarter, revenue rose 37%.

Online stores experienced 3% growth compared to last year's quarter with revenue amounting to $49.9 billion. Meanwhile, physical store revenue increased 13% to $4.27 billion.

Third-party seller services such as marketplace commissions, fulfillment, and shipping fees, brought in $24.25 billion to the revenue table, but 18% growth is quite a slowdown after the second quarter's 34% and first quarter's 60%.

For the first time in Amazon's history, services revenue surpassed net product sales. More precisely, retail sales amounted to $54.9 billion while AWS, advertising, third-party seller services, and Prime subscriptions brought in $55.9 billion. Amazon Web Services exceeded estimates with as revenue expanded 39% to $16.11 billion, topping the $15.48 billion that analysts expected. As for operating profit, AWS generated $4.88 billion whereas the parent company is far behind with only $880 million.

Fourth-Quarter Guidance

Sales are expected in the range between $130 billion and $140 billion, representing growth between 4% and 12%, whereas FactSet expected a growth rate of 13.2% YoY and more precisely, $142.1 billion. Amazon CEO Andy Jassy is expecting "several billion dollars" of extra costs in its consumer business due to labor shortages, higher employee costs, global supply chain constraints, and increased freight and shipping costs. In a few words, Amazon is navigating expensive challenges as it enters the peak holiday season. Olsavsky expects costs related to labor, inflation and productivity headwinds in warehouses to cost the company $4 billion.

As a result, operating profit is expected in the range of $0 and $3 billion, compared to $6.9 billion in last year's comparable quarter.

Expensive Short-Term Challenges

Amazon is taking expensive action to deal with global supply chain challenges such as adding new shipping ports and boosting its fleet.

In September, Amazon stated it is looking to hire 125,000 employees nationwide whereas earlier in October, it added plans to hire 100,000 seasonal employees to the equation to meet the holiday shopping demand. CFO Brian Olsavsky warned in the prior quarter that the company is facing steep labor costs, including $3,000 sign-on bonuses and new perks to retain its 750,000 hourly employees such as covering the full cost of college tuition fees, including books. Its rivals Walmart (NYSE: WMT) and Target (NYSE: TGT) have also upped the perks in an attempt to lure workers with dangling incentives.

Takeaway

Amazon is simply reckoning with decelerating sales growth as consumers return to physical stores in an environment shaped by expensive supply chain challenges that also caused Apple Inc (NASDAQ: AAPL) to disappoint analysts for the first time in years.

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