Insights

Amazon Q3 Earnings Recap

Amazon_Q3_Earnings_Recap

Amazon CFO Brian Olsavksy started off the company’s Q3 earnings call by echoing Prime Day messaging — that Prime Day was a success for Prime members and small-and-medium-sized businesses. Over the two-day event, third-party sellers surpassed a record-breaking $3.5 billion in sales.

Focusing on the success of small-and-medium businesses breaks away from previous years when the retailer touted record-breaking company-wide sales. This change in tone follows intense scrutiny coming from House lawmakers, who allege that the retail giant has engaged in anti-competitive practices against third-party sellers on its platform. Lawmakers haven’t taken any action against Amazon, but a recent antitrust lawsuit filed by the Justice Department against Google has darkened the atmosphere.

Potential action from lawmakers isn’t the only cloud looming over Amazon. The retailer is also facing an ongoing pandemic and massive consumer demand in Q4. In the fourth quarter guidance portion of its earnings release, Amazon said that its operating income in Q4 is expected to be between $1.0 billion and $4.5 billion, compared with $3.9 billion in fourth-quarter 2019. Those conservative projections are based on an assumed $4 billion in costs related to COVID-19.

“We generally have a lot of uncertainty around the holiday,” said Amazon CFO Brian Oslavsky when asked about the Q4 projections. “Things from holiday spending to what our cost to fulfilled normal orders would be, weather issues that can come up. This year is an election year, we saw some disruption in 2016. So there’s a whole host of issues that generally come to bear in Q4. I think the fact that COVID is dwarfing all of those is causing us a lot of uncertainty on our top-line range.”

Aside from possible challenges in Q4, much of the earnings call focused on Amazon’s stellar performance in Q3. Amazon’s net sales increased by 37% to $96.1 billion in Q3, compared with $70 billion in Q3 2019.

“Our consolidated revenue and operating income exceeded the top end of our guidance range,” said Oslavsky. “As demand remained strong in the quarter, the extra volume and operating leverage helped us to achieve higher-than-expected profitability.”

Capacity was also a main topic throughout the earnings call. Capacity has been a major concern since the retailer throttled its supply chain back in March. Since then, Amazon has taken major steps to prepare for the surging demand anticipated in Q4.

Amazon brought on 250,000 employees in Q3, added 100,000 more in the first month of Q4, and made “significant additions to fulfillment centers and transportation facilities.”

“We were able to fill up any excess capacity in Q2 and Q3 that might have seasonally been excess,” Said Oslavsky. “As we get into Q4 and everything is stepping up, we’re adding it [capacity] and using it simultaneously. We had a really good test for Prime Day, and we feel good about the performance of the network, and we continue to add on top of that. So lots of excitement around the holiday, but we feel we’re in good shape and ready to go.”

 

What brands can take away from the earnings call

There’s been a nervous energy surrounding capacity heading into Q4. Many brands are wondering if the FBA limitations that happened back in March could again happen as holiday shopping begins to pick up. Amazon took a positive tone throughout its earnings call, but that doesn’t necessarily mean brands can relax.

Now more than ever, it’s important for brands to ensure supply chains are nimble and ready to adapt. Being quickly able to shift fulfillment methods is the best way to avoid potential bottlenecks in Amazon’s supply chain.

Another big difference between Q4 and Q2 is that consumers are now anticipating possible shipping delays, and in response, could start their holiday shopping earlier this year. In a consumer survey performed by the Cleveland Research Company, 36% of respondents said they planned to start their Christmas shopping earlier this year than last year.

“Get your holiday shopping done early” might be a good message for brands to test and incorporate into their advertising. As Amazon CFO Brian Oslavsky said in the earnings call, “It’s advantageous to the customer and probably to the companies for people to order early this year.”