The Supply Chain Matters blog highlights Amazon’s Q3-2022 financial reporting that provided quite a shock to investors along with views as to what is unfolding in market and supply chain perspectives.

 

In a week that has provided a good amount of concerning news for tech companies, Amazon likely provided the most troubling, or perhaps awakening news in terms of online shopping, B2BC and B2C commerce and online logistics fulfillment trends.

While global parcel and logistics services provider FedEx’s recent financial performance provided a shudder to investors, in hindsight and added context, that might have been more to do with that provider’s internal strategy implications. Amazon’s latest reporting is more to do with online shopping demand trending.

 

Q3-2022 Financial Reporting

In its reporting of Q3-2022 financial performance, the online commerce platform provider provided a number of concerning warning signs that prompted an immediate reaction to the company’s stock value. Equity analyst and Wall Street influencers used adjectives such as “atrocious,” “dreadful,” and “disappointing,” in summing up the latest quarterly results. Some have now acknowledged that the online provider went too aggressively on its expansion plans during the last two plus years.

What attracted the most attention and concern was sales and profitability projections for the current holiday fulfillment quarter. Indicated was that Amazon anticipates Q4 sales growth to be a mere 2 percent. Operating profitability guidance for the current holiday fulfillment quarter was expressed as being between zero and $4 billion, which is a heck of a bandwidth and uncertainty for such a critical quarter.

Revenues for the recently completed third quarter were reported as being up 15 percent to $127.1 billion, compared with $110.8 billion in the year earlier. Online sales reportedly rose 7 percent to $53.5 billion after declining in recent quarters. Keep in mind that the recent quarter included a second Prime Day two-day shopping event. The event was designed to harvest a head start on consumer holiday spending but other retailers quicly added their own promotions at the same time.

Revenues in the higher margin AWS Cloud infrastructure business reportedly increased 27 percent to $20.5 billion in the quarter. According to reporting by Bloomberg, Q3 AWS revenues represented the slowest year-over-year growth rate since Amazon began specific reporting of the AWS unit in 2014.

Operating income declined 9 percent to $2.5 billion in the third quarter, compared with $4.9 billion in the equivalent 2021 quarter. This was also the first quarter in 2022 thus far that the online platform provider has generated profitability. Regionally, the North America segment incurred an operating loss of $0.4 billion while the international segment had a reported loss of $2.5 billion.

Operating cash flow reportedly decreased 27 percent to $39.7 billion for the trailing twelve months compared to $54.7 billion for the trailing twelve months that ended in September 2021.

Like other global based companies, the strengthening of the U.S. dollar has created added challenges for Amazon, quantified to be an estimated reduction of $5 billion in the most recent quarter. That is obviously contributing to the online provider’s future outlook.

As we pen this commentary, Amazon’s market value has now dropped below $1 trillion on the earnings news, with the company’s stock value declining over 8 percent at mid-day.

 

Added Perspectives

What really caught this Editor’s attention was direct statements from company’s CFO Brian Olsavsky, who indicated that the online provider is sensing that consumer behavior is being influenced by high inflation and restricted household spending. Looking forward, some direct statements included:  “We are preparing for what could be a slower growth period like most companies. We want to be very careful on our hiring.”

He further stated: “We certainly are looking at our cost structure and looking for areas where we can save money.”

This is clearly a far different perspective that has come from Amazon leadership in a long time and a more sobering recognition of a now unfolding slower phase of company growth. The reported slowdown in AWS revenue momentum is akin to your banker informing you that your line of credit is being reduced after your spending pattern depended on such support. With so many global wide businesses large and small dependent on Amazon for online fulfillment merchandising and customer fulfilment needs, this changed perspective has to be concerning.

A further perspective in this Editor’s view is not presuming that this upcoming all-important holiday fulfilment period will completely validate a doom and gloom scenario for consumer buying trends for physical goods. We have yet to observe what really occurs over the next two months. That is not to dilute a realization that overall consumer sentiment and household budgets are definitely strained with current high inflation and economic recession concerns across the globe, and especially in Europe.  Indeed, prudence and caution are warranted until holiday fulfillment shopping among all brick and mortar and online channels is assessed. Definitions of muted retail spending can take on different dimensions and connotations.

In a Supply Chain Matters commentary published in late June, we shared our views as to what Amazon’s various senior leadership changes at the time would lead to in terms of business strategies.

One was initiating added efforts toward fusing physical in-store and online retail merchandizing efforts into a singular shopping capability in an effort to spur added revenue and profitability growth.  The other was a focus on increased efficiencies including enhanced automation of work processes, determining more realistic short- and longer-term capacity needs, and more than likely, rationalization of headcount requirements over the next three-year horizon.

Five months since, there are clearer signs of both strategies playing out, perhaps with added context after the Q3 financial results and what really occurs in the final quarter.

Amazon continues to add more awareness to its more sobering outlook in what we recently described as an unfolding news cycle with a purpose.  This company’s actions always have a strategy context with clear business, supply chain operational and workforce goals in mind. It is part of the company’s DNA.

Since September there have been a series of announced moves involving management, workforce and compensation changes, ongoing operational changes and added strategic moves. There are now hiring freezes in place for retail and other business segments. Starting salaries have been raised for customer fulfillment workers and delivery drivers working among independent last mile delivery contractors to likely fend-off labor organizing efforts.

Q3 financial reporting was yet another milestone, but some investors were either not prepared or anticipated the numbers. Follow along since this narrative of events with a purpose will continue in the coming months and quarters.

Amazon will continue to influence online and other buying strategies for many quarters to come. The differences will be manifested in revised strategies.

 

Bob Ferrari

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