$AMZN | Coming Out Stronger

Overall this was a solid quarter for Amazon (AMZN), all things considered. A notable headline revenue beat accompanied by a margin/cost-driven EPS miss -- with revenue up 26% and EBIT down 10% YY. The market perhaps doesn’t like the profit result or profit guidance, but it should have been expecting it given what’s going on with the business in this time of heightened demand. 

The business is focused on more 1P (lower margin) and necessity categories (lower margin) while investing in people and spending on cleaning and other procedures for Covid-19 precautions.  Demand led Amazon to hire and additional 175k employees in the last couple months, taking the growth in new employees to levels not seen in about 2.5 years and Amazon will likely hit 1mm employees by year end.

Though the P&L may suffer over the short term, it’s hard to see how this time of disruption is anything but bullish for Amazon’s long term cash flow as ecommerce adoption rapidly accelerates and consumers that were potentially reluctant to get Prime or shop Amazon find new value in speedy/high frequency ecommerce shopping.  Amazon remains on our Long Bias list.

Trend

• Revenue accelerated 560bps to +26.4% driven by strength in North America both online and in stores.  Online accelerated to 31.7% from 24.1% last Q, stores (Whole Foods) accelerated to +7.7% from -0.9% last Q.
• International accelerated 500bps on an easier compare (+100bps on 2 year) and AWS slowed on both a 1 and 2 year basis growing 32.8% this Q vs 34% last Q.
• Margins in 1Q suffered given $600mm in costs around Covid-19 compensation and operational procedures, plus $400mm in increased reserves for doubtful accounts.  Gross margin was down 184bps and operating margin was down 212bps. There was still a bit of incremental costs for 1 day shipping capabilities as well of about $1bn, even as shipping times extended in March.
• Guidance on revenue implies a similar rate of change on the high end, but profits are expected to tank as the company foresees $4bn in costs in 2Q for Covid actions.  Still management sees anywhere from a $1.5bn loss to a $1.5bn gain in the upcoming quarter (excluding Covid expenses would mean ~50% EBIT growth YY in the quarter lapping the ramp of 1day shipping last year).  One of the big expenses might be management’s plan to do its own employee virus testing, an expected $300mm expense.  Amazon is putting a lot of money in to try protect employees and reward their efforts, ‘people’ costs make up the majority of that $4bn.
• International is seeing some unique headwinds to revenue as India limits product availability to grocery only temporarily and in April French courts forced a closure of Amazon French fulfillment centers (goods can still be bought, just not through these specific fulfillment locations).

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