Amazon’s physical store sales rebound in Q1 amid pandemic

After four quarters of virtually flat results, Amazon’s physical stores saw robust sales growth for the fiscal 2020 first quarter, with overall and online-store sales both surging around 25%, driven in part by the coronavirus pandemic.

For the quarter ended March 31, physical store sales totaled at $4.64 billion, up 8% from about $4.31 billion a year earlier, Amazon said yesterday after the market close. On a sequential basis, physical store sales climbed 6.3% from $4.36 billion in the fiscal 2019 fourth quarter, when sales declined 0.9% year over year.

“On the physical stores, [sales] increased year over year at about 8%. That is predominantly Whole Foods, but it’s the Whole Foods in-store shopping experience rather than the online order. So that’s up quite a bit from the run rate you've seen in some recent quarters,” Amazon Chief Financial Officer Brian Olsavsky told analysts in a conference call yesterday.

Amazon’s physical store sales for fiscal 2019 were $17.19 billion, marking a 0.2% dip from $17.22 billion in 2018. The Seattle-based company’s physical store sales come mainly from its Whole Foods Market unit and exclude online orders made through its brick-and-mortar brands, such as Prime Now delivery and pickup via Whole Foods stores.

Related:Amazon, Whole Foods limit online grocery customers

Online store sales for Amazon in the 2020 first quarter jumped 24% to $36.65 billion from $29.5 billion a year ago. Excluding the impact of foreign exchange, the gain was 25%, Amazon said. Sequentially, Q1 sales were down 19.7% from $45.66 billion in the 2019 fourth quarter, which includes the key holiday selling period.

“Beginning in early March, we experienced a major surge in customer demand, particularly for household staples and other essential products, across categories such as health and personal care, groceries and even home office supplies. At the same time, we saw lower demand for discretionary items such as apparel, shoes and wireless products. This large demand spike created major challenges in our operations network and with our seller community and our suppliers,” Olsavsky said in the conference call late Thursday.

“While we generally have experience in getting ready for spikes in demand for known events like the holiday season and Prime Day, we also generally spend months ramping up for these periods. The COVID crisis allowed for no such preparation,” he explained. “We took quick action to react to the higher order levels while continuing to provide for the safety of our workforce. We established rigorous safety and cleaning protocols, including maintaining six-foot social distancing, procuring 100 million masks, tens of millions of gloves and wipes, and other cleaning supplies. We began requiring temperature checks across our operations network. In our Whole Foods stores, we added plexiglass barriers between cashiers and customers and reserved special hours for senior customers to shop. We temporarily raised wages and overtime premiums, we funded a new Amazon Relief Fund, and we allowed employees to take unpaid time off at their discretion.”

Related:Whole Foods, Amazon enact temporary wage hike in coronavirus response

Amazon founder and CEO Jeff Bezos dons a face mask as he walks through a plexiglass-shielded checkout lane at a Whole Foods store.

During the quarter, Amazon hired another 175,000 new employees, including many displaced workers from other industry sectors, Olsavsky said. “We took steps to dampen demand for non-essential products, including reducing our marketing spend. Our network pivoted to shipping priority of products within one to four days and extending promises on non-priority items,” he added.

Online grocery has boomed, Olsavsky reported. Amazon has expanded e-grocery delivery capacity by more than 60% and pickup at Whole Foods from 80 stores to more than 150 stores.

“We have seen increased demand in online grocery shopping, and we have a number of ways for customers to do that — Prime Now, AmazonFresh and then of course Whole Foods online for delivery or pickup,” he said. “And really beginning in March and continuing now through April, we’re seeing that increased demand, so that has continued. A lot of our focus is on working around the clock and offering as much delivery as possible.”

Since the initial surge in demand from the COVID-19 outbreak, growth rates for in-store shopping have moderated, according to Olsavsky.

“Still a lot of work being done there both for the workers that are doing the delivery and the workers that are in the stores,” he told analysts. “A lot of focus on our part to make sure that they’re safe and healthy and able to accommodate customers and make sure customers are comfortable however they choose to shop.”

Currently, Amazon’s U.S. physical stores include 487 Whole Foods Markets (508 including Canada and the United Kingdom), 25 Amazon Go cashierless convenience stores, one Amazon Go Grocery store, 21 Amazon Books stores, 12 Amazon 4-Star outlets and six Presented by Amazon locations. The e-tailer doesn’t break out sales totals for its brick-and-mortar retail segments.

Twenty-one of the 25 small-format, cashierless Amazon Go c-stores have been temporarily closed since late March due to the pandemic. Those stores include all of the San Francisco, New York City and Chicago locations plus an employee-only mini outlet in Seattle's Macy's building. The four other Seattle Amazon Go stores remain open, as does the Amazon Go Grocery store in Seattle.

Amazon has expanded e-grocery delivery capacity by more than 60% and pickup at Whole Foods from 80 stores to more than 150 stores.

All Amazon Books, Amazon 4-Star and Amazon pop-up stores also are closed. In late March, Amazon began licensing Amazon Go's "Just Walk Out" technology to other retailers to help create safer shopping environments during the COVID-19 crisis.

Companywide, Amazon turned in first-quarter 2020 net sales of $$75.5 billion, up 25% from $59.7 billion a year earlier. Excluding a negative impact of $387 million from changes in foreign exchange rates, net sales rose 27%, the company said.

Operating income fell 9.1% to $4 billion in the quarter from $4.4 billion a year ago. Meanwhile, net earnings declined to $2.5 billion, or $5.01 per diluted share, from $3.6 billion, or $7.09 per diluted share, in the prior-year period.

Analysts, on average, had projected net earnings per share of $6.25, with estimates ranging from a low of $4.68 to a high of $7.82, according to Refinitiv/Thomson Reuters.

“Providing for customers and protecting employees as this crisis continues for more months is going to take skill, humility, invention and money. If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small,” founder and CEO Jeff Bezos (left) said in a statement.

“Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. 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.”

Olsavsky said in the analyst call that Amazon invested more than $600 million in coronavirus-related costs in the first quarter, and the company expects those costs to climb to $4 billion or more in the next quarter.

“The current 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,” Bezos stated. “We are inspired by all the essential workers we see doing their jobs — nurses and doctors, grocery store cashiers, police officers and our own extraordinary frontline employees. The service we provide has never been more critical, and the people doing the frontline work — our employees and all the contractors throughout our supply chain — are counting on us to keep them safe as they do that work. We’re not going to let them down.”