The Amazon Earnings Speculation Story

As e-tailer (Nasdaq:AMZN) prepares to deliver on its promise of posting an operating profit forthe fourth quarter ended in December with its earnings report due January 22nd, analysts are looking beyond the numbers, wondering if the company can start growing again.

“They have essentially promised (a profit), and people take it for grantedthat they have to do it,” US Bancorp Piper Jaffray analyst Safa Ratschy toldthe E-Commerce Times. “If they can produce anything above $10 million, thatwould get attention that this is an operation that can generate significantcash.”

Though analysts have confidence Amazon will make good on its promise, they expect the company to lose money overall. Theconsensus forecast is for a loss of 7 cents per share for the quarter.

Amazon has predicted fourth-quarter sales of US$970 million to $1.07 billion,and analysts are expecting the number to come in somewhere in the middle.The Seattle, Washington-based e-tail giant is unlikely to disappoint, because “that’s a pretty wide range,” Morningstar analyst David Kathman told the E-CommerceTimes.

Cutting Room

Cost cuts, price reductions and a focus on used items will enable Amazon tomeet its profits before-taxes-and-charges goal, analysts say. Though the expectedprofit is only on a pro-forma basis and excludes a range of taxes, chargesand other items that will contribute to a bottom-line loss, “it would stillbe a significant thing,” because it would show that operations areperforming well, Kathman said.

“Their growth has just slowed tremendously, but they’ve made some moreprogress toward profitability,” Kathman said. “The big challenge is to boost growth and maintainprofitability.”

The quarter’s results are not likely to include any big charges, andAmazon — unlike some other companies that use their own measures ofsuccess — has always been forthcoming about how it arrives at its pro-formaprojections and exactly what items it leaves out, said Kathman. Amazon’squarterly press releases, which detail the accounting methods, are among “the longest I’ve ever seen,” he added.

In the third quarter, cost cuts enabled Amazon to narrow its operating lossby 60 percent, even as revenue remained flat with a year earlier.

Boom to Bust

In its early days, Amazon grew by leaps and bounds, without concern forprofitability. When the Internet bubble burst, the company — havingestablished its position at the forefront of the e-tail sector –retrenched, focusing on achieving a profit at the expense of revenue.

Amazon “is well positioned long-term to capture the growth of e-commerce,given its established brand name, global opportunity, large customer baseand superior technology platform,” wrote Goldman Sachs analyst Anthony Notoin a January 7th research note. “Near-term, the company faces the challengeof driving both cost rationalization while striving to reaccelerate growth.”

A fourth-quarter pro-forma profit, wrote Noto, is “critical to helpingAmazon break out of the box created by the necessity of managing twocompeting objectives” — boosting sales and controlling costs.

Trading Places

The company’s strategy of offering used merchandise alongside new items, forexample, is helping the bottom line because the company incurs little or nowarehousing costs for the used goods. However, said Kathman, there is thepotential that used-product sales could “cannibalize” sales of new items.”It’s kind of a trade-off,” he said.

Noto agreed, but approved of the strategy overall. “Used and servicerevenue provide higher-margin revenue, which should lead to meaningfulupside” to operating income, he wrote in the January 7th note.

According to Kathman, 17 percent of all goods sold on in thethird quarter were used goods. At the same time, the gross margin on thoseproducts, he said, is “much fatter,” at 80 percent, versus about 25 percentfor the company’s traditional e-tail business. “It kind of skews the resultsa little bit,” he said.

A big problem for Amazon is that its core business of books, music andvideo “has become a mature market on the Internet,” said US Bancorp’sRatschy.

Amazon, Ratschy said, is responding correctly by lowering prices andoffering more used items. “They just have to go through this process ofpeople wanting to buy used books and cheaper books until they totally lockthe market.”

Holiday Heights

Post-holiday reports showed Amazon was a strong performer in that crucialselling season. Amazon was one of the 10 fastest-growing e-tailers onNetRatings’ holiday list, and did more business than any of the other nine.

However, anlaysts warned, those reports could be deceiving. The company’sown “Delight-o-Meter,” which tracks the number of items sold, does not tellhow much money the company made on each item. “I always want to see theactual numbers,” said Morningstar’s Kathman.

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