Investors had high expectations heading into Amazon's (AMZN 3.66%) holiday quarter announcement. The pandemic supercharged online shopping and moved more business activity to the cloud, lifting results for both of the tech giant's main business lines in 2020.
But the fourth quarter still represented a head-turning record for the company. Sales blew past management's forecast, Amazon revealed this week, to land at $126 billion, or roughly $1.4 billion for each day in Q4.
Let's take a look at how Amazon prospered through that historic strain on its fulfillment and supply chains over the holidays.
Meeting the growth challenge
The biggest chunk of Amazon's revenue came from product sales, with holiday volumes hitting a record 1 billion in Q4. The company wasn't shy about preparing for this spike, though. Amazon hired 175,000 employees during the quarter, more than triple the rate from a year earlier. It added logistics space, including warehouse capacity, at a blistering 50% annual rate even as sales were soaring. Typically it has all these buildings up and running before the demand spike hits in Q4, but this year didn't allow for that flexibility.
"Our teams pulled out all the stops to be ready," CFO Brian Olsavsky told investors. "It turns out we needed that capacity in order to fill the strong consumer demand." Amazon said the growth was driven by demand for things like household staples and other home products, along with a general shift toward more online shopping.
Spending more money
Amazon spent tons of cash over the last few months, with big-ticket items including $4 billion on COVID-19 protection like employee testing. Hourly wages rose, too, and fulfillment expenses jumped to $18.5 billion from $12.1 billion a year ago.
Yet the business still achieved some major financial wins. Operating income improved by roughly $1 billion in both the web services segment and the retailing division, so that overall operating earnings hit $6.9 billion.
In October, CEO Jeff Bezos and his team had projected income would land between $1 billion and $4.5 billion, in contrast, compared to $3.9 billion a year ago. Rising demand made the difference. "The additional volume," Olsavsky explained, "helped to achieve higher than expected profits."
Preparing for more demand
Amazon hasn't run out of productive ways to allocate all that cash. Spending projects for 2021 include aggressively adding to its warehouse, fulfillment, office space, and data center capacities. Yet those plans are harder to make this year because executives must estimate the proportion of recent growth that was temporary as opposed to a sustained increase in demand. People won't be spending as much in 2021 on populating home gyms, for example, or decking out home office spaces.
The company intends to err on the side of having too much capacity, though, so it can be prepared in case explosive growth trends extend further into 2021.
With cash flow having jumped 72% in the past year to over $66 billion, Amazon clearly has the resources it needs to be bold this year. That strategy is its best path toward locking in most of the market share it won through the 2020 year that saw it add over $100 billion to its sales footprint.