On the back of yet another disappointing earnings report, Amazon stock (AMZN) - Get Amazon.com, Inc. Report has been performing poorly lately. As Aureus Asset Management CEO Karen Firestone stated, better-than-expected sales growth could have driven the stock price up again – but this ended up not being the case.
Growth in Amazon’s e-commerce segment decelerated again in Q3, creating the opposite effect that investors had hoped for. Today, the Amazon Maven discusses what has caused the slowdown in Amazon’s online store revenues, the cost pressures, and how things can change for the retail giant.
(Read more from the Amazon Maven: Amazon Stock: Should You Buy In November?)
Higher labor costs
Pandemic restrictions caused demand for online shopping to spike in 2020, leading Amazon to double its operation capacity to handle the higher volume of goods shipped. However, increased demand turned out to be a double-edged sword.
The same restrictions reduced the number of available workers, causing a hike in average wages: $18 per hour plus an additional $3 per hour, depending on shifts and locations, and sign-on bonuses of up to $3,000. In addition, Amazon also incurred billions of dollars in expenses related to COVID-19 prevention and testing.
CFO Brian Olsavsky has put numbers around the new hiring initiatives:
“We have grown our global headcount by 628,000 employees in the past 18 months and [we are] recruiting for more, including more than 150,000 in the US to support Q4 seasonal demand.”
Since the primary constraint has been labor shortage rather than physical space or fulfillment capacity, inventory has often been managed on the base of workforce availability. The strategy has resulted in less optimal and longer (hence more expensive) transportation routes. The CFO added:
“Our operations are normally well staffed and optimized to be in stock and to deliver to customers in one to two days. 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.”
(Read more from the Amazon Maven: Amazon Stock: Earnings Day Failed To Ease Fears)
Supply chain disruptions
Due in great part to the pandemic, supply and demand for raw materials and distribution services have been impacted globally. Mr. Olsavsky has hinted that supply chain disruptions helped to drive cost pressures, including steel and third-party trucking services. As a result, Amazon estimates that extra labor costs, labor-related productivity losses, and material cost inflation added nearly $2 billion to Q3 operating expenses. Looking forward:
“Our Q4 guidance range anticipates that these costs will approach $4 billion in Q4 as we see a full quarter’s impact of these effects and a higher seasonal unit volume. In Q3, we saw nearly $1 billion of inflationary pressures primarily tied to wage increases and incentives in our operations.”
Where to go from here?
First, expectations need to be reset – if they have not already. Pandemic restrictions in the key markets where Amazon operates are largely over. Therefore, 2020 sales growth may not serve as good parameter for future performance. Swinging in the other direction, 2021 may also prove to be an outlier, as supply disruptions and labor shortages should ease over time.
That said, Amazon seems to be doing well in the face of severe disruptions in retail. Across other segments, including AWS, subscription services and advertising, things have been looking much better. Should e-commerce return to some sort of normal in the foreseeable future (say, sometime in 2022), we think that now may be a good time to buy Amazon stock at a discount.
Our sister channel Apple Maven has recently asked on Twitter: which of the following mega-cap stocks would you rather buy and hold through the end of November? Check out the poll below.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)