Amazon’s forecast for the vacation quarter is disappointing as labor and supply problems increase

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Oct. 28 (Reuters) – Amazon.com Inc (AMZN.O) reported a decline in earnings Thursday that is expected to continue through the holiday quarter as higher recruiting wages and other operational disruptions add to the company’s profits decrease through online shopping.

In after-hours trading, stocks fell 4%.

After a year of blockbuster results, the world’s largest online retailer is facing a more difficult outlook. In a tight labor market, it has raised the average US warehouse wage to $ 18 an hour and marketed ever higher contract premiums to attract workers it needs to keep its high-volume operation going.

Meanwhile, the company is struggling with global challenges in the supply chain. It has doubled its container processing capabilities, expanded its supply partner program, and increased its warehouse investments – all at a remarkable price.

The company expects operating income for the current quarter to be between $ 0 billion and $ 3.0 billion, less than the $ 6.9 billion Amazon posted last year. In the third quarter just ended, net profits fell by around 50% to $ 3.16 billion, a first since the coronavirus pandemic began in the United States.

Andy Jassy, ​​who became CEO in July, said in a statement that Amazon was facing higher shipping costs, higher wages and labor shortages. Those work challenges, coupled with lost productivity and cost inflation, added $ 2 billion to Amazon’s spending in the quarter, an amount that is expected to double over the holiday season.

Amazon is “doing whatever it takes to minimize the impact on customers and distributors this holiday season,” he said. “In the short term it will be expensive for us, but it is the right prioritization for our customers and partners.”

The retailer tried to avoid a repeat of the 2013 season when some delays on Christmas Day went with no gifts.

Amazon’s struggle to occupy its warehouses poses challenges for rivals this holiday season. Retailers have struggled to fill their shelves with popular toys, gadgets, and sneakers.

The problems in the supply chain also cost Apple Inc (AAPL.O) $ 6 billion in revenue in the company’s fourth quarter, according to results released on Thursday. Apple CEO Tim Cook said the impact will be worse during the Christmas sales quarter. Continue reading

Michael Pachter, an analyst at Wedbush Securities, said Amazon’s supply chain challenge surprised him because he believed the company had many products on its shelves that could be swapped for those stuck on container ships.

“I thought they’d be fine about the selection,” he said. “Apparently that’s not true.”

The Amazon logo can be seen outside of its JFK8 distribution center in Staten Island, New York, the United States, November 25, 2020. REUTERS / Brendan McDermid

LABOR FORCE

Some analysts like Nicholas Hyett of Hargreaves Lansdown gave Amazon a pass. They say the company’s track record of spending big on delivering to customers has paid off in the long run.

“Amazon has never been overly focused on bottom line,” said Hyett.

Still, Amazon CFO Brian Olsavsky said in a call with analysts that there are some costs to be said here. While the price of steel needed to build bearings has increased and the company will source such items cheaper in the future, he said Amazon’s base wage increases could be permanent.

He told reporters that Amazon faced an inconsistent workforce and that workers, not physical space, became its main capacity constraint in the third quarter. It plans to hire 150,000 more workers to meet seasonal demand in the US on this holiday.

This restriction has had a ripple effect.

“Inventory placement is often routed to fulfillment centers that have manpower to obtain this product, resulting in less optimal placement, resulting in longer and more expensive transportation routes,” he said.

The employees are also pushing for more. Around 2,000 workers in New York City moved a vote this week on whether their warehouse should become the company’s first unionized facility in the United States.

Olsavsky said Amazon made no announcement whether to charge more for its loyalty club Prime subscriptions, but added that the company is always considering that option.

In order to increase sales, the company started encouraging customers to buy holiday offers on October 4th of this year. Consumers have started to return to pre-pandemic shopping levels and spend more on travel and services, Olsavsky said.

The company forecasts fourth quarter sales between $ 130 billion and $ 140 billion. According to IBES data from Refinitiv, analysts expected $ 142.05 billion. It also missed expectations for third quarter revenue, seeing its slowest growth since the COVID-19 outbreak.

Amazon’s cloud computing division was a bright spot. Olsavsky said that revenue growth for this business has accelerated again, with the company exceeding analyst expectations with net sales of $ 16.1 billion for the quarter. Amazon Web Services saw revenue surge with demand for games and remote working during the pandemic.

Total Amazon net sales rose to $ 110.8 billion in the third quarter; Analysts had forecast $ 111.6 billion.

Reporting by Nivedita Balu in Bengaluru and Jeffrey Dastin in Palo Alto, California; Editing by Arun Koyyur, Daniel Wallis and Grant McCool

Our Standards: The Thomson Reuters Trust Principles.

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