Amazon earnings drop nearly 50% and holiday forecast disappoints, sending stock south

Analysts on average expected earnings of $8.90 a share on sales of $111.55 billion, according to FactSet. Amazon shares fell more than 4% in after-hours trading following the release of the results, after closing the regular session with a 1.6% gain at $3,446.57.

Investors expected the earnings decline after Amazon’s weak forecast three months ago, an acknowledgment of unprecedented supply-chain and staffing issues that could weigh on Amazon’s costs. That dynamic factored into Amazon’s increased cost of sales, which increased to $62.93 billion from $57.11 billion, and costs to fulfill and ship orders, which increased to $18.5 billion from $14.71 billion.

“I would have thought they were a little more immune to some of the freight problems because so much of the stuff is delivered on their own network, but they’re obviously being impacted and they’re going to spend at all costs to keep that customer experience high,” Edward Jones consumer discretionary analyst Brian Yarbrough told MarketWatch after the numbers hit Thursday.

Chief Executive Andy Jassy outlined those massive costs that will weigh on the retailer’s holiday season.

“In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply-chain issues, and increased freight and shipping costs — all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season,” Jassy said in a statement. “It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.”

In a conference call Thursday afternoon, Chief Financial Officer Brian Olsavsky was more specific on the costs, detailing expectations for $4 billion in fourth-quarter costs related to “labor, labor-related productivity losses and cost inflation,” after those issues led to an additional $2 billion in costs in the third quarter.

“In short, our operations are normally well staffed and optimized to be in stock and to deliver to customers in one to two days,” Olsavsky said. “Labor shortages and supply chain disruptions upset this balance and resulted in additional costs to ensure that we continue to maintain our service levels to customers.”

After accounting for those costs, Amazon guided for operating income of break-even to $3 billion, which would be a major decrease from $6.87 billion a year ago; analysts on average were projecting $7.71 billion. Holiday sales are expected to be $130 billion to $140 billion, after Amazon put up a record $125.56 billion in the fourth quarter a year ago; analysts on average predicted $142.17 billion, according to FactSet.

The disappointing sales growth and profit performance largely landed on the e-commerce side of the business, as Amazon’s cloud-computing arm, Amazon Web Services, continued to shine. AWS put up sales of $16.11 billion, an increase of 39% from $11.6 billion a year ago, and recorded operating profit of $4.88 billion, up roughly 38% from $3.54 billion a year ago.

The rest of the business recorded an operating loss, mostly thanks to Amazon’s international operations. International retail sales had long been a money-losing proposition for Amazon until the COVID-19 pandemic, which flipped the segment into the green for five consecutive quarters, a streak that ended with Thursday’s report that showed a $911 million operating loss.

“The long-term trends remain the same in international,” Olsavsky said Thursday. “We’re in different stages in different countries. The established countries of Europe and Japan are further along obviously and they perform closer to the North America results. We have new countries we’ve added a lot in the last few years — the investments in Brazil, the Middle East, Australia, adjacent countries like Poland and Sweden within Europe … are all important investments, but they start as an investment.”

Operating profit from North American retail operations also declined sharply in the third quarter, to $880 million from $2.25 billion a year ago and $3.15 billion in the second quarter. Online sales grew only 3% year-over-year, the first time that percentage gain has not been in double-digits since at least early 2017.

“Across the board on the retail side, the revenue was disappointing, the profitability was disappointing, those were the big misses,” said Yarbrough, who has a buy rating on the stock.

Amazon shares have struggled since the company’s previous earnings report and forecast disappointed, falling 5.3% in the past three months, and the stock is only up 8.6% in the past year. The S&P 500 index SPX, +0.98% has grown 3.4% and 39.2% in those periods, respectively.