Amazon Shares Dive After Surprise Earnings Miss, Will Spend About $4 Billion on COVID-19 Costs

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Amazon earnings fell far below expectations when the e-commerce giant reported first-quarter results after the market close Thursday. Though some on Wall Street had expected the Seattle-based tech giant to benefit from the increase in online shopping amid the ongoing coronavirus outbreak that has been keeping people at home, Amazon CEO Jeff Bezos said that the company will spend an expected $4 billion in operating profit on coronavirus-related expenses in Q2.

Bezos noted in the earnings release that the current coronavirus 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.”

“Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit,” he said. “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. This includes investments in personal protective equipment, enhanced cleaning of our facilities, less efficient process paths that better allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop our own COVID-19 testing capabilities. There is a lot of uncertainty in the world right now, and the best investment we can make is in the safety and well-being of our hundreds of thousands of employees. I’m confident that our long-term oriented shareowners will understand and embrace our approach, and that in fact they would expect no less.”

The company expects to spend $300 million on COVID-19 testing development in Q2, said Amazon CFO Brian Olsavsky on the earnings call, but did not venture to say whether that might be an area it is interested in expanding into permanently.

The ongoing coronavirus outbreak has meant tens of millions of people, both in the U.S. and abroad, are sheltering in place in a collective effort to fend off the spread of COVID-19. That has translated to more online shopping and more engagement with streaming services.

First-time Prime Video viewers nearly doubled, said Olsavsky, and video rentals has increased. Customers are also using Alexa more often, particularly for music and questions, he added. The company does not typically break out in-depth details on Amazon Studios or Prime Video in its quarterly report.

Earnings per share fell 29% to $5.01 during the quarter, while net sales rose 26% from the prior-year quarter to $75.5 billion. Analysts were expecting $6.25 a share on revenues of $73.61 billion.

Amazon’s stock closed up around 4.3% going into the earnings report, hitting a new high, but fell sharply in after-hours trading.

The quarter, which ended March 31, includes the impact of the first few weeks of stay-at-home orders.

“It’s easier to get ready for a holiday or a Prime Day” than an unexpected crisis such as the current one, said Olsavsky, when asked about the company’s learnings over the past month or two.

The company, which has prioritized shipments of essential items such as medical supplies and household staples, is “acting aggressively to help protect customers from bad actors” and has removed over one million offers from its site “due to COVID-based price gouging,” and suspended over 10,000 selling accounts for violating its fair-pricing policies.

Amid complaints that customers are having difficulty finding grocery delivery windows, Amazon is also increasing order capacity for Prime Now, Amazon Fresh and Whole Foods Market. It is expanding Whole Foods grocery pickup to 150 stores, up from about 80 locations, and having certain locations dedicate time during the day to exclusively fulfilling online grocery orders. Whole Foods stores will also have plexiglass barriers between cashiers and customers at checkout, in addition to introducing “enhanced” cleaning protocols.

Grocery delivery volume rose 60% during the quarter, said Olsavsky.

In Q1, Amazon launched premium movie rental service Prime Video Cinema, which allows viewers to stream in-theater movies at home, in the U.S., U.K, and Germany. Among the Amazon Studios series launched during the quarter are Heidi Klum and Tim Gunn’s “Making the Cut,” a reality fashion competition series that weaves together the company’s e-commerce and Amazon Fashion divisions.

Amazon Studios also renewed the NFL’s “Thursday Night Football” through 2022, and the exclusive global rights to one late-season game globally on Prime Video and Twitch for each of the next three seasons.

For the current quarter, Amazon expects net sales of $75 billion to $81 billion, marking 18%-28% year-over-year growth, and operating income that could range from a loss of $1.5 billion to growth of $1.5 billion, compared to $3.1 billion in Q2 2019. That guidance includes the estimated $4 billion in COVID-19-related costs. Wall Street analysts are projecting the June-ended quarter will yield $5.88 in per-share earnings and $78 billion in revenue.

Notably, the last time Amazon recorded a quarterly loss was in Q3 2014 (of $500 million), notes Jefferies analyst Brent Thill.