To virtually no one’s surprise, Amazon saw a dramatic increase in its net retail sales during the first weeks of the coronavirus pandemic, generating $65.2 billion for the three months ending March 31, 2020, a 25.4% jump from the $52 billion in sales during Q1 2019. These figures exclude revenue generated by Amazon Web Services (AWS). However, Amazon’s overall net income dropped to $2.5 billion, or $5.01 per diluted share in Q1 2020, compared to $3.6 billion, or $7.09 per share, in Q1 2019.
“Amazon’s Q1 performance, with explosive topline retail growth more than offset by the costs involved with its ongoing push for ever-faster delivery speed, in addition to some increased costs resulting from the coronavirus, is in line with our reduced expectations from an operating perspective,” said Charlie O’Shea, lead Amazon analyst at Moody’s Investors Service in comments provided to Retail TouchPoints. O’Shea added that Q1 2019 was a historically high quarter, with Amazon generating $2.3 billion in retail operating income.
The majority of Amazon’s expenditures in Q2 will be in response to the COVID-19 pandemic. Calling the current crisis “the hardest time we’ve ever faced,” Amazon CEO Jeff Bezos warned the company’s shareholders in a statement to “take a seat, because we’re not thinking small.
“Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit,” Bezos added. “But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe. This includes investments in personal protective equipment, enhanced cleaning of our facilities, less efficient process paths that better allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop our own COVID-19 testing capabilities.”
Amazon is doing its best to factor in the unpredictability of the current situation. The company’s Q2 operating income projection ranges from a $1.5 billion loss to a $1.5 billion profit. “Guidance for Q2, with a potential $3 billion swing in operating income, is wide even for Amazon, reflecting the uncertain retail environment due to the coronavirus,” said O’Shea.
Despite the uncertainty, analysts were at least somewhat impressed with Amazon’s performance. “Amazon’s huge topline acceleration isn’t a complete surprise amid the pandemic’s shifting consumer spending in favor of e-Commerce and online grocery,” said Andrew Lipsman, Principal Analyst at eMarketer in comments provided to Retail TouchPoints.
“The bottom-line performance was on the lighter side, but not altogether unexpected in light of the commerce business’ escalating costs of labor and delivery logistics and shift in mix towards less profitable categories like grocery,” Lipsman added. “The fact that the high-margin cloud and advertising businesses — both of which had downside risk — held up well, should help offset elevated costs in the commerce business over the next couple of quarters.”
One of Amazon’s challenges moving forward is common to all online businesses: holding on to the many new shoppers trying out e-Commerce for items they would normally have purchased in brick-and-mortar stores. “The coronavirus pandemic will also help Amazon move forward as it will acquire a new customer base,” said Kunal Chopra, CEO at etailz, which offers solutions for third-party sellers on Amazon’s marketplace. “People who didn’t previously shop online, are now getting packages delivered to their doorstep within two days. Amazon should start seeing a new customer base take shape on its platform.”
Even the company’s missteps could turn into benefits if Amazon is able to learn from them. “Amazon will likely realize downstream benefits from the stress placed on its fulfillment and distribution operations during COVID-19,” said Chopra. “The sudden and drastic change in consumer buying behavior has exposed weaknesses in the system. By amending those weaknesses, Amazon will become even better at its core business: operations.”