Nothing has been easy for businesses lately. Since the end of 2019, they have been dealing with lockdowns, supply chains, rising costs and higher interest rates. Now they may be dealing with the possibility of expanding for a demand that may not come.
(ticker: AMZN). During his conference call in the first quarter of last month, Chief Financial Officer Brian Olsavsky acknowledged that Amazon had “built to the top of a highly volatile demand outlook,” but realized it has an “opportunity to better align our capacity with the question.” Olsavsky used the word “overcapacity” and admitted that Amazon had expanded too quickly.
The stock took a beating. Amazon shares are down about 22% since its first quarter earnings, while the
are about 6% and 8% lower, respectively.
One problem was that Amazon was hiring workers faster than sales grew, a sign of overcapacity and declining efficiency. Revenue per employee for the past 12 months was $297,107. That’s impressive, but in 2019, before the pandemic, the figure was $351,531, so sales productivity is down about 15%.
Other companies in the
index have undergone similar declines. For some, the stat has fallen as sales plummeted and failed to recover to prepandemic levels. For example,
revenue has fallen to about $3.5 billion from nearly $21 billion in 2019, while headcount has fallen to less than 40,000 from over 100,000 as management tried to control costs. Other companies including:
(SCHW), have made acquisitions or divestments in recent years that make comparisons very difficult.
Still, 12 companies, plus Amazon, were able to grow sales while seeing a major drop in sales productivity from 2019 levels. It’s a diverse group:
Morgan Stanley (MS)
Universal health services
(UHS), ManpowerGroup (MAN),
(ALL) and Equinix (EQIX). Their average sales productivity decline since 2019: 17%.
Amazon shares are down about 32% this year. Nvidia, at 40% off, is the only stock in the group that did worse. Costco is down 12%; Morgan Stanley, 18% and Mastercard, 7%. Only Allstate has risen this year, about 9%. Despite this, not all of these stocks are cheap. While Goldman, Morgan Stanley and Huntington trade for 11 times the profit or less, Costco trades at 38 times; Nvidia, on 31 times.
Falling revenue per employee doesn’t doom a company, but it can cause problems if it has grown too much. One to watch: Costco. Same-store retailer revenue growth averaged about 11% last year, compared to 6% before the pandemic. But growth has slowed since recent peaks. Costco will report fiscal third quarter results on May 26, and if the outlook points to a slowdown, investors could be in for an unpleasant surprise.
write to Al Root at [email protected]