Amazon earnings drop the most in four years 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 immediately 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 acknowledgement 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.

“Following the wage hike for fulfillment-center employees which was pulled forward to 2Q21, Amazon announced incremental compensation increases (along with signing bonuses) as well as plans to add ~150k personnel (across all employment lines) in 4Q21. We assume that from a customer-service perspective Amazon will expedite delivery/bear the incremental shipping cost,” Credit Suisse analysts wrote in a preview of the report. “These two factors result in increases to our Fulfillment/Shipping expenses.”

The biggest concern heading into the print was if those same issues would weigh on the retailer’s holiday season, and that also came in lower than expectations as Chief Executive Andy Jassy outlined massive costs ahead.

“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.”

Amazon guided for fourth-quarter sales of $130 billion to $140 billion, after putting up a record $125.56 billion in the fourth quarter a year ago; analysts on average predicted $142.17 billion, according to FactSet. The company predicted operating income of nothing to $3 billion, which would be a major decrease from $6.87 billion a year ago; analysts on average were projecting $7.71 billion.

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.

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.

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.