It's the most wonderful time of the year for retailers. The holiday season kicks off with Thanksgiving and Black Friday, and customers spend the most in the fiscal fourth quarter. It can also tell a lot about where a company is. The fourth quarter should be large and juicy for healthy retailers, and if it isn't, that could indicate problems.
This year could look different from usual since most retailers are still feeling the impact of stubborn inflation. While it hasn't continued to skyrocket, it's still keeping prices up and pressuring spending. Holiday sales may not be the boon they typically are for retailers.
The fourth quarter is always Amazon's (AMZN -1.07%) largest by far. Fourth-quarter sales dwarf the other three as customers choose its tried-and-true products and fulfillment to get gifts and deals easily. However, there's been a negative pattern over the past few years during the holiday shopping season, and all eyes should be watching for it this year.
Didn't Amazon just demonstrate a rebound?
Like many other retailers, Amazon's business has been impacted by trends surrounding the pandemic. Soaring growth slowed to a trickle, and only in the 2023 third quarter did Amazon demonstrate what looks like a real rebound. Sales increased 13% over last year, an acceleration, operating income increased more than four-fold to $11.2 billion, and net income more than tripled from $2.9 billion last year to $9.9 billion this year.
CEO Andy Jassy, who's been on the job for only a bit more than a year, has pivoted to tightening the company's belt after it built out too much to meet demand that rose and then faded. It's been dealing with its own rising costs due to inflation while attempting to straddle profitability by offering customers the free and fast shipping that brings in the dollars.
And this is across its vast set of businesses that start with e-commerce but include Amazon Web Service's (AWS) cloud computing, streaming, connected devices, healthcare, and more.
There's a lot going on right now. AWS recently launched a broad array of generative artificial intelligence (AI) services that has caused a stir, and Amazon is speeding up its delivery times to more areas through a combination of a restructured fulfillment network and AI capabilities throughout its delivery processes.
It's also leveraging its massive data stores to operate a growing advertising business that's padding the bottom line. Ad sales accelerated to a 26% increase over last year.
What to watch this holiday season
Seeing between the lines, though, Amazon's online store sales have decreased successively over the past three years in the fourth quarter despite total sales increasing year over year.
Chart by author.
Overall, e-commerce increased year over year, but it was entirely due to third-party sellers. Third-party sellers account for more than 60% of sales, and Amazon is increasingly dependent on them to dominate e-commerce. It's also more dependent on its other businesses to generate growth even though e-commerce still provides the bulk of its revenue.
Being a platform for other sellers has its benefits. Since there's no cost of goods sold involved, it's a higher-margin business than the simple retail model. But the flip side is that it doesn't have as much control over these other sellers. It's trying to get more of them to choose Amazon logistics for fulfillment, where it can get products to customers more quickly. Those efforts are actually part of a Federal Trade Commission probe right now.
The company is also offering Buy With Prime as an option on third-party sellers' websites to bring them into the Amazon ecosystem. Third-party sellers often use several platforms besides Amazon for the same products. These sellers are often just as dependent on Amazon as it is on them since it exposes them to Amazon's millions of Prime accounts and other customers. They typically comply with Amazon's directives, and it works for everyone.
Pay attention to Amazon's e-commerce sales
This holiday season, pay attention to Amazon's online store sales to get a sense of the underlying health of Amazon's e-commerce business. If it continues to slide, there may be cause for concern.
It wouldn't mean that Amazon's done -- it's still the leading e-commerce retailer by far. But it would confirm that Amazon is in a new phase and that its growth levers are outside of e-commerce right now. Investors should consider that information when deciding whether to buy Amazon stock.
