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Amazon weakness worries Wall Street

October 2005

Amazon weakness worries Wall Street

By Monica Soto Ouchi
October 26, 2005

In July, sold a record 1.5 million advanced orders of "Harry Potter and the Half-Blood Prince." Even this wasn't enough to make its quarter fly. The online retailer Tuesday reported a 44 percent drop in third-quarter profit, the result of a substantial, one-time legal settlement, higher income taxes and shipping promotions. Amazon in August agreed to pay $40 million to Chicago-based Soverain Software to settle two lawsuits tied to online-payment technology. The company's tax bill, meanwhile, ballooned. Amazon spent $21 million in income taxes for the quarter compared with $3 million a year ago. All of these expenses sliced into Amazon's third-quarter profit. The company reported earnings of $30 million, or 7 cents a share, missing analysts' consensus forecasts by 3 cents. Sales rose 27 percent to $1.86 billion.

The company's stock fell 76 cents to close at $46.17, and then tumbled 8.1 percent in after-hours trading to $42.71. Amazon announced its financial results after the bell. The company opened the year at $44.95 a share and has traded as low as $30.60 in the past 52 weeks.

One-time charges aside, Wall Street has a broader, ongoing concern. With increasingly sophisticated competition, how profitable can Amazon truly become? The Seattle-based company has spurred sales by using a combination of deep discounts on items such as books and electronics and free shipping on orders of $25 or more.

For instance, Amazon sold more than 1.6 million copies of the sixth Harry Potter book in the quarter, making it the online retailer's largest new-product release. However, it significantly discounted the book to fend off competitors, ensuring less money trickled to the bottom line. And even with the sharp discount, Harry Potter fans didn't turn to Amazon after the book's release. It sold the majority of the copies — 1.5 million — as pre-orders. The company has also placed a significant bet on free-shipping promotions designed to break one of the last barriers to e-commerce. After finding success in its first shipping promotion, the company in February introduced Amazon Prime. For $79 per year, members receive unlimited two-day shipping on all orders and overnight shipping for $3.99 more per item.

With the critical holiday-shopping season in swing, the company hopes customers will take to the express-shipping membership program, increasing the fraction of purchases it buys from Amazon. This test, however, has been expensive. While the company recorded third-quarter shipping revenue of $112 million — up 30 percent vs. a year ago — its shipping loss widened 15 percent to $47 million.

Amazon Chief Executive Jeff Bezos reiterated Tuesday that while its shipping promotions are expensive short term, "we think it's one of the most important things we're doing in the long term."

Ken Marlin, managing partner of New York-based Marlin & Associates, said Amazon remains one of the strongest online retailers. Even though books remains its largest category and there is stiff competition in other categories, "we also see them winning in every sector they're in," he said.

The company Tuesday forecast full-year sales of $8.37 billion to $8.67 billion, slightly lowering the forecast it put out in July. "They have put out a cautious forecast for the holiday-shopping season," Marlin said. "We think they can exceed that."

Monica Soto Ouchi: 206-515-5632 or

Copyright © 2005 The Seattle Times Company

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