Nothing has been easy lately for businesses. Since the end of 2019, they have had to deal with blockages, supply chain problems, rising costs and higher interest rates. Now they might have to face the possibility of them expanding to meet demand that might not come.
(symbol: AMZN). During his first quarter conference call last month, Chief Financial Officer Brian Olsavsky acknowledged that Amazon had “built up a very volatile demand outlook,” only to realize that it had “an opportunity to better match our capacity to demand. Olsavsky used the word ‘overcapacity’, admitting that Amazon had grown too quickly.
The stock took a beating. Amazon shares are down about 22% since first-quarter results, while the
are off about 6% and 8%, respectively.
One problem was that Amazon was hiring employees faster than sales were growing, a sign of overcapacity and declining efficiency. Revenue per employee over the past 12 months was $297,107. That’s impressive, but in 2019, before the pandemic, the figure was $351,531, so sales productivity was down about 15%.
Other companies from
the index suffered similar declines. For some, the metric dropped because sales plummeted and did not return to pre-pandemic levels. For example, Carnival’s (CCL) sales fell to around $3.5 billion from nearly $21 billion in 2019, while headcount fell to less than 40,000 from over 100,000 as management attempted to contain costs. Other companies, including
(SCHW), have made acquisitions or divestitures in recent years that make comparisons very difficult.
Yet 12 companies, plus Amazon, were able to increase sales while experiencing steep declines in sales productivity from 2019 levels. It’s a diverse group:
(TTC), Morgan Stanley (MS),
Universal health services
(UHS), ManpowerGroup (MAN),
(ALL) and Equinix (EQIX). Their average drop in sales productivity since 2019: 17%.
Amazon stock is down about 32% this year. Nvidia, down 40%, was the only stock in the group that did worse. Costco fell 12%; Morgan Stanley, 18%, and Mastercard, 7%. Only Allstate is up this year, some 9%. Despite this, not all of these stocks come cheap. While Goldman, Morgan Stanley and Huntington are trading for 11 times earnings or less, Costco is trading at 38 times; Nvidia, 31 times.
Falling sales per employee does not doom a business, but can spell trouble if it has grown too much. One to watch: Costco. The retailer’s same-store sales growth has averaged about 11% over the past year, compared to 6% before the pandemic. But growth has slowed from recent highs. Costco reports its fiscal third quarter results on May 26, and if its outlook suggests a deceleration, investors could be in for a nasty surprise.
Write to Al Root at [email protected]