Amazon’s Build-out Collides With Inflation Surge

Amazon’s projections for the second quarter also disappointed, with the midpoint of its forecast range pointing to a third consecutive quarter of single-digit revenue growth.

Photo: Spencer Platt/Getty Images

Amazon. AMZN 4.65% com has a rough summer ahead. Or at least a very busy one.

The e-commerce giant’s first-quarter results Thursday afternoon showed starkly the multipronged impact of rising costs and slowing demand in an inflationary environment. Total sales of $116.4 billion were up only 7% year-over-year—the company’s slowest growth rate in at least 12 years. That was in line with Wall Street’s estimates, but operating income of about $3.7 billion was 31% below analysts’ targets.

Amazon’s projections for the second quarter also disappointed, with the midpoint of the company’s forecast range pointing to a third consecutive quarter of single-digit revenue growth and operating income at nearly a five-year low. Amazon’s share price slid nearly 10% in after-hours trading—setting up what could be the stock’s worst single-day drop since 2014.

The line between Amazon and Walmart is becoming increasingly blurred, as the two companies seek to maintain their slice of the estimated $5 trillion retail market while chipping away at the other’s share, often by borrowing the other’s ideas. Photos: Amazon/Walmart

No one expected an impressive quarter. Rising inflation and fuel costs make for a poor operating environment for a company that runs fleets of planes and delivery trucks, and which now employs more than 1.6 million full-time workers. Fuel costs alone are significant; diesel fuel prices in the U.S. surged 43% during the first quarter, according to tracking by GasBuddy. Earlier this month, Amazon announced a 5% fuel surcharge being added to the per-unit fee rates for sellers using the company’s fulfillment network. But that will not cover the items Amazon sells itself through its online stores segment, which is still nearly half of the company’s total revenue.

Fuel prices are beyond even Amazon’s control. But the company has other areas where it can make improvements. The rapid build-out of fulfillment centers and other delivery infrastructure that began early in the pandemic has resulted in excess warehouse space, which chief financial officer Brian Olsavsky says added about $2 billion in “incremental costs” during the quarter. On a call Thursday, Mr. Olsavsky said Amazon will be working to wring out the inefficiencies over the next two quarters, though he added that it would be “mostly Q4” when the company would see the benefits.

That means Amazon has at least one more rough quarter ahead—especially since the company noted Thursday that its annual Prime Day sales event won’t take place until the third quarter this year. Amazon’s projections typically fall on the conservative side, and the stock is now at its lowest price in nearly two years. The AWS cloud computing business is also doing very well, with revenue up 37% year over year and record-high operating margins of 35% in the first quarter. But while the cloud pads Amazon’s bottom line, most of the e-tail giant’s business still relies on keeping its trucks rolling. And that is getting more costly than ever.

Write to Dan Gallagher at dan.gallagher@wsj.com

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