Soaring wages, shipping rates and Covid costs are likely to eat away at Amazon’s Q4 bottom line, but the world’s biggest online retailer is still a top-line powerhouse.
Amazon (AMZN) – Get Amazon.com, Inc. Report shares slumped lower Thursday ahead of a key fourth quarter earnings report for the world’s largest online retailer that is likely to focus on labor costs and e-commerce growth.
Amazon, which looks to have held onto the massive gains in market share is gathered during the pandemic, is finding the cost of that maintenance increasing: wage increases and fulfilment center and shipping expenses are eating into profits, and with nearly 11 million unfilled positions in the U.S. economy at the end of December, hiring is expected to be a challenge again in the coming year.
Amazon, in fact, said in October that it would hire 150,000 workers heading into the holiday season, with wages as high as $21 an hour, amid one of the most severe labor shortages in U.S. history. Sign-on bonuses of up to $3,000 were also on the table, Amazon said, with the bulk of the new roles based in Arizona, California, Colorado and Florida.
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Amazon CFO Brian Olsavsky cautioned at the time that costs linked to hiring, inflation and other “operational disruptions” could rise to as high as $4 billion over the December quarter, while forecasting for revenues of between $130 billion and $140 billion.
On a headline basis, Amazon is expected to earn $3.67 a share on revenues of $137.6 billion over the three months ending in December, with a 2022 EPS range of around $56 per share.
“Based on a combination of channel checks, publicly available media reports, and ancillary results, we fully expect Amazon will be a share gainer this holiday period, supply chain issues notwithstanding,” Benchmark analyst Daniel Kurnos. “The big issue, of course, will be at what cost, as we have heard smaller, admittedly less-well scaled stories of an incremental 25% to a 5x increase in holiday-related costs in the final 6 weeks of 2021.”
Amazon shares were marked 6.5% lower in mid-morning trading Thursday to change hands at $2,814.44 each, dragged down in part by Meta Platform’s (FB) – Get Meta Platforms Inc. Class A Report 25% plunge and rising interest rates sparked by hawkish comments from the European Central Bank.
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There could also be some discussion of splitting the company’s four-digit stock, following a similar move by Google parent Alphabet (GOOGL) – Get Alphabet Inc. Class A Report earlier this week, although management is reported to be focused on maximizing profits from its Web Services business first now the new president Adam Selipsky is in place.
For the three months ending in September, Amazon posted net sales of $110.8 billion, a 15.2% increase from last year that fell just shy of Street forecasts. Its dominant Web services business, however, netted a better-than-expected $16.1 billion in sales.
“Two-plus years have passed since accelerated one-day shipping and COVID-19 cost investment began, and anticipation for relief keeps building, while visibility remains limited, as always, making catalysts challenging,” said BMO Capital Markets analyst Daniel Salmon, who carries a $3,600 price target with an ‘outperform’ rating into the earnings.
“However, we remain Outperform rated on Amazon as we believe AWS should see strong demand post COVID-19,” he added. “And Amazon continues to lead the rise of Retail Media, while its brand/video ad offering ramps into exclusive Thursday Night Football telecasts starting September.”
