Surging expenses and modest expectations for fourth-quarter sales growth caused Amazon to forecast profits that under the most optimistic scenario would be less than half those of the prior year.
The bleak holiday season outlook came as Amazon reported sales for its third quarter increased 15% to $110.8 billion, within the company’s forecast range of $106 billion to $112 billion shared at the end of the second quarter. That’s impressive growth, but profits were a different story: Net income fell to $3.2 billion and earnings per share fell to $6.12 from net income during the prior-year third quarter of $6.3 billion and earnings per share of $12.37.
The profit decline would have been worse, but Amazon’s AWS cloud-computing division saved the day: North American sales increased 10.4% to $65.6 billion, but operating profit fell 61% to $881 million. The company said that sales at its physical stores, which includes Whole Foods Market and Amazon Fresh stores, increased 13% to nearly $4.3 billion.
International sales increased 15.7% to $29.1 billion, but operating profits declined to a $911 million loss. The AWS division increased sales 16.1% to $39 billion, while operating profits increased 38% to $4.8 billion.
Expenses rose in key areas, which CEO Andy Jassy positioned as the company doing right by customers rather than maximizing near-term profits. For example, fulfillment expenses increased 27.8% to $18.5 billion, technology and content expenses increased 31% to $14.4 billion, and marketing expenses increased 47.4% to $8 billion. Customers appreciated Amazon’s commitment, which is part of what drove the 39% growth in AWS revenue, according to Jassy.
“It’s also driven extraordinary investments across our businesses to satisfy customer needs. Just one example is that we’ve nearly doubled the size of our fulfillment network since the pandemic began,” Jassy said. “In the fourth quarter, we expect to incur several billion dollars of additional costs in our consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs, all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season.
In the fourth quarter, sales are expected to increase between 4% and 12% to $130 billion to $140 billion. However, extreme expense pressures prompted the company to forecast that operating profits could range from zero to $3 billion, compared with $6.9 billion in operating profits in the fourth quarter of 2020.
Seattle-based Amazon is No. 2 on Progressive Grocer’s 2021 list of the top food and consumables retailers in North America, while its wholly owned subsidiary, Austin, Texas-based Whole Foods, is No. 26 on PG's list.