Amazon expects supply chain, labor issues to cost it billions in Q4

Meanwhile, in Q3, profits and losses from Amazon's North American and International e-commerce businesses effectively canceled each other out, leaving AWS to account for all of its operating income.

The fourth quarter of fiscal year 2021 will be a costly one for Amazon, the company said Thursday. 

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"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," CEO Andy Jassy said in a statement. "It'll be expensive for us in the short term, but it's the right prioritization for our customers and partners."

For the fourth quarter, Amazon expects net sales between $130 billion and $140 billion. It expects operating income to come in between $0 and $3 billion.

Meanwhile, the e-commerce and cloud giant's third quarter financial results, reported on Thursday, fell below market expectations. The profits and losses from Amazon's North American and International e-commerce business segments effectively canceled each other out, leaving Amazon Web Services to account for all of its operating income. 

AWS, Amazon's cloud business, brought in $4.88 billion in operating income in Q3. North America's Q3 operating income was $880 million, while the International segment posted a loss of $990 million.

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Amazon

Overall, Amazon's Q3 net income decreased to $3.2 billion in the third quarter, or $6.12 per diluted share, compared with $6.3 billion, or $12.37 per diluted share, in third quarter 2020. Net sales increased 15% to $110.8 billion in the third quarter, compared with $96.1 billion in third quarter 2020.

Analysts were expecting earnings of $8.92 on revenue of $111.6 billion. 

"We've always said that when confronted with the choice between optimizing for short-term profits versus what's best for customers over the long term, we will choose the latter—and you can see that during every phase of this pandemic," Jassy said in his statement. "In the first several months of COVID-19, Amazonians played an essential role to help people secure the requisite PPE, food, and other in-demand items needed, and we worked closely with businesses and governments to leverage AWS to maintain business continuity as they responded to the pandemic. Customers have appreciated this commitment, which is part of what's driving this past quarter's AWS growth acceleration to 39% year over year; but, 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."

Breaking down revenue by segment, AWS brought in $16.11 billion in net sales in Q3. Its 39% growth rate is better than Q2's 37% growth rate and above the 29% growth rate posted in Q3 2020.

Amazon's North America segment brought in net sales of $65.56 billion, growing at just 10% year-over-year. International net sales accounted for $29.15 billion, growing at 16%. 

Advertising services are the primary driver of sales in Amazon's "Other" category, not an official business segment. Amazon said the category grew 50% in the third quarter to increase net sales by $8.09 billion.

Digging further into its labor challenges, Amazon CFO Brian Olsavsky said on a conference call Thursday that the shortage of workers in the US started to have a notable impact on Amazon's operations and cost structure in Q3. 

"It has led to wage increases and sign-on incentives as companies compete for workers as well as inconsistent staffing levels in our operations," he said. "In addition, disruption to the global supply chains and inflation in the cost of materials such as steel and services such as trucking have also raised our cost of operations. We estimate the cost of labor, labor-related productivity losses and cost inflation to have added approximately $2 billion in operating costs in Q3, particularly in August and September."

Amazon's Q4 guidance range anticipates that these costs will approach $4 billion in the quarter as the company sees a full quarter's impact of these effects and a higher seasonal unit volume.