Amazon returns to ‘debt-fueled growth’ amid online boom

Diving Brief:

  • from Amazon First day this week will be a “litmus test” for the e-commerce giant and the sustainability of exponential digital retail sales growth, Moody’s analysts led by Charlie O’Shea said in an emailed report this week. .
  • Amid the rapid shift to e-commerce during the COVID-19 pandemic, costs for Amazon are expected to “rise,” with Moody’s analysts estimating fourth-quarter shipping spending could hit $20 billion.
  • Helping Amazon fuel its growth this year is the “massive” $10 billion in new debt the company released in June. Analysts say the company has the ability to take on debt to continue growing while maintaining its A2 rating given the growth in operating profit.

Overview of the dive:

Much of Amazon’s story is one of skyrocketing growth. The company has often tested the limits of its own capacity and capacity for growth.

This year has brought an external jolt to Amazon’s growth in the form of COVID-19. As malls and non-essential chain stores closed shop, consumers turned to the internet to make their purchases. Since the reopening of stores across the country, e-commerce growth has remained well over 20% year after year, with consumers still seeking to avoid stores and the possibility of contracting the new coronavirus.

The holidays will likely bring the same, with many estimates anticipating 25% growth or more in online shopping for the season.

Amazon has been quick to respond to surges in demand after experiencing “hiccups”, in O’Shea’s words, along the way. For nearly a month beginning in mid-March, the retailer banned many products of its warehouses so that it can focus on meeting household necessities and other essentials. The e-commerce giant has also postponed Prime Day, its summer bonanza of online sales, to October.

During the year, Amazon tried to catch up with demand. In September, the the company announced that it was hiring 100,000 new full-time and part-time workers in its fulfillment operations, after hiring more than 130,000 earlier in the year. In the second quarter alone, Amazon added approximately $5.6 billion year-over-year for its shipping costsfor a total of $13.7 billion.

And there is no end to the growth in sight. One way or another, Amazon will have to fund all this manic capacity building and shipping. As O’Shea wrote, “The ongoing pandemic crisis has highlighted one thing: spending needs will continue to soar as large online and retail incumbents adapt to this new normal.”

Amazon is not alone in all of this. Walmart and Target, among others, have also ramped up their digital businesses and omnichannel capability this year and have posted online sales growth at or near three digits This year. Moody’s analysts describe it as a “race” for market share in online sales.

As Amazon tries to maintain and grow its market share, the retailer will undoubtedly continue to spend. According to Moody’s, depending on whether or not the company is willing to accept a credit rating downgrade, which could increase its borrowing costs, the company could afford to finance and spend an additional $35 billion before his grade does not drop.

Analysts also suggested that a multi-billion dollar physical acquisition or investment, similar to Amazon’s $13.4 billion acquisition of Whole Foods, “could make sense to improve its ability to execute.” .

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