Amazon’s Holiday Forecast Disappoints as Labor, Supply Issues Mount

By Jeffrey Dastin and Nivedita Balu

Oct 28 (Reuters) – Amazon.com Inc on Thursday reported a slump in profit that it expects will continue through the holiday quarter, as higher wages and spending to attract workers diminish the company’s windfall from online shopping.

Shares fell 4% in after-hours trade.

After a year of blockbuster results, the world’s largest online retailer is facing a tougher outlook. In a tight labor market, it has boosted average U.S. warehouse pay to $18 per hour and marketed ever bigger signing bonuses to attract blue-collar staff it needs to keep its high-turnover operation humming.

The company meanwhile is contending with global supply chain disruptions. It has doubled its container processing ability, expanded its delivery service partner program and has ramped up its warehouse investments – all at a noteworthy cost.

The company said it expects operating profit for the current quarter to be between $0 and $3.0 billion, short of $6.9 billion Amazon posted the year prior. In the just-ended third quarter, net income fell by about 50% to $3.16 billion, a first since the start of the coronavirus pandemic in the United States.

Andy Jassy, who took the helm of Amazon as CEO in July, said in a statement the company would incur several billion dollars of extra expenses in its consumer business to deal with higher shipping costs, increased wages and labor shortages.

Amazon is “doing whatever it takes to minimize the impact on customers and selling partners this holiday season,” he said. “It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.”

The retailer has strived to prevent a repeat of the 2013 season when delays left some without presents on Christmas Day.

Retailers are facing supply constraints on everything from toys and Nike sneakers to laptops, making it difficult for them to stock their shelves.

Supply chain woes are also costing Apple Inc – $6 billion in sales during the company’s fiscal fourth quarter according to results released on Thursday. Apple Chief Executive Tim Cook said that the impact will be even worse during the holiday sales quarter.

Some analysts like Nicholas Hyett of Hargreaves Lansdown gave Amazon a pass, recognizing the company’s track record of high spending to deliver for customers has paid off in the long run.

“Amazon has never been overly focused on the bottom line,” Hyett said. “That willingness to invest in what the group hopes will be long term success at the expense of short term profits is on display again in these results.”

LABOR SHORTAGE

Guru Hariharan, a former Amazon manager who is now CEO of CommerceIQ, said out-of-stocks were at an all time high for the company.

“The online marketplace will need to continue to address fill rates to meet demand before the holiday shopping season,” he said.

Amazon CFO Brian Olsavsky said on a call with reporters that the labor shortage had been a challenge, leading to inconsistent staffing levels. Workers, not physical space, became its primary capacity constraint in the third quarter, he said.

And that has had a ripple effect.

“Inventory placement is frequently redirected to fulfillment centers that have labor to receive this product, which results in less optimal placement, which leads to longer and more expensive transportation routes,” he said.

Amazon faced an extra $2 billion in costs from labor, inflation and operational disruptions, an amount that is supposed to rise to $4 billion in the current period, Olsavsky said.

Staff are pushing for more, too. Around 2,000 workers in New York City petitioned this week for a vote on whether to make their warehouse the company’s first unionized facility in the United States.

To juice sales, the company began encouraging customers to shop holiday deals as early as Oct. 4 this year. Still, consumers have begun returning to pre-pandemic shopping levels, spending more on travel and services, Olsavsky said.

The company forecast fourth-quarter sales to be between $130 billion and $140 billion. Analysts were expecting $142.05 billion, according to IBES data from Refinitiv. It missed expectations for third-quarter sales as well, witnessing its slowest growth since the COVID-19 outbreak.

Amazon’s cloud computing division was a bright spot. Olsavsky said revenue growth re-accelerated for that business, and the company beat analysts’ expectations with net sales of $16.1 billion in the quarter. Amazon Web Services has seen sales rise with demand for gaming and remote work during the pandemic.

Total net sales rose to $110.81 billion in the third quarter ended Sept. 30, from $96.15 billion, a year earlier.

Analysts had predicted $111.60 billion, according to IBES data from Refinitiv. (Reporting by Nivedita Balu in Bengaluru and Jeffrey Dastin in Palo Alto, California; Editing by Arun Koyyur, Grant McCool and Daniel Wallis)

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