Amazon founder and CEO Jeff Bezos warned the company’s stockholders that Amazon may incur a second-quarter operating loss as it spends at least $4 billion from April through June on its coronavirus pandemic response, including some $300 million to develop its own testing capabilities.
Amazon’s first-quarter sales were up 26% year over year to $75.5 billion – well above the high end of the company’s previous expectations. Despite the revenue surge, expenses related to Amazon’s pandemic response weighed on the bottom line in the quarter ended March 31. Amazon’s net income fell 29% to $2.5 billion, or $5.01 per share, compared to $3.6 billion, or $7.09 per share, during the first quarter of 2019, it said Thursday afternoon.
Bezos, in a statement, said the “current crisis is demonstrating the adaptability and durability of Amazon’s business as never before, but it’s also the hardest time we’ve ever faced.”
He pledged ongoing service to Amazon’s customers and support of its employees and contractors, some of whom are planning walkouts Friday to protest what they see as an inadequate response to the coronavirus pandemic. The company is also ending a policy on Friday granting hourly employees unlimited unpaid time off during the pandemic. Meanwhile, Amazon told its technology and corporate employees, the vast majority of whom have been working from home since early March, that they “are welcome to do so until at least Oct. 2.”
“Providing for customers and protecting employees as this crisis continues for more months is going to take skill, humility, invention, and money,” Bezos said in a statement. “If you’re a shareowner in Amazon, you may want 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. 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.”
Throughout Amazon’s 25-year history, Bezos has been willing to sacrifice profitability to invest in long-term initiatives. “I’m confident that our long-term oriented shareowners will understand and embrace our approach, and that in fact they would expect no less,” Bezos said.
Amazon shares, which closed at a record high of $2,474 on Thursday – giving the company a market value in excess of $1.23 trillion – lost about 5% in after-hours trading, after the earnings report was released.
Amazon’s fulfillment and delivery operations sagged under the combination of unprecedented demand for essential goods and high rates of absenteeism as employees fearful of contracting or spreading coronavirus at work stayed home. Amazon granted unlimited unpaid time off beginning in March, though employees have clamored for paid sick leave, with many saying they couldn’t afford to miss a paycheck.
Company executives have not provided a total count of infected employees or facilities and declined to do so in a conference call with reporters Thursday. More than 200 cases are known publicly, according to a count of local media reports. One employee group has tallied at least 600 individual cases among Amazon’s workforce.
The spike in business beginning in early March was similar to what the company sees during the holiday period or its Prime Day summer sale, but Amazon didn’t have months to prepare and the products people are buying are less profitable for the company, said chief financial officer Brian Olsavsky. Bottlenecks in the company’s warehouses have contributed to delivery delays; Amazon in 2019 had begun a costly rollout of standard one-day delivery on many items for customers who pay ahead for shipping through its Prime membership program.
Amazon has since hired 175,000 people and now employs more than 935,000 full- and part-time workers globally, in addition to hundreds of thousands of people whose work is tied to the company as delivery contractors or employees of third-party sellers doing business on its site.
Amazon’s ramp-up of coronavirus testing capacity is a key piece of its strategy for operating amid the ongoing pandemic. Olsavsky said total costs for testing this year could reach $1 billion. Amazon announced earlier in April that it was developing a coronavirus testing laboratory and has since begun “a pilot to test frontline employees.” Olsavsky said Amazon decided to build its own testing capacity because it was not readily available on the scale the company needs. He said he didn’t yet know if this represented a future business opportunity for Amazon, but suggested any excess capacity the company develops could be used to help in other areas.
Olsavsky said the majority of the $4 billion in second-quarter spending is related to wage increases — the company has boosted hourly wage floors by $2 through mid-May and increased overtime pay — and productivity losses. The company is also continuing to spend more on personal protective equipment and enhanced facility cleaning, though some employees continue to see these measures as inadequate and want Amazon to shut warehouses where COVID-positive employees have worked for two weeks.
Amazon on Thursday said it would begin asking customers shopping at its Whole Foods Market stores — where sales grew 8% during the quarter — to wear masks, and that it would provide free, disposable ones for their use beginning within the next week.
Amazon’s highly profitable cloud-computing business continues growing rapidly with quarterly revenue up 33% from a year ago to $10.2 billion. Olsavsky said Amazon Web Services (AWS) demand is growing in some areas as people and companies use more video conferencing, online entertainment and gaming and remote learning. But other industries hard-hit by the pandemic such as travel and hospitality have seen significant reductions in usage, he said.
Amazon expects net sales of between $75 billion and $81 billion in the second quarter, up between 18% and 28% from the same period in 2019. Operations may result in losses of up to $1.5 billion or a $1.5 billion profit, compared with a $3.1 billion operating profit last year. But there’s more than the usual uncertainty: The company’s COVID-specific caveat on its financial guidance runs to nearly 200 words.