AMZN $57~53.50 ---- Price-Cutting Cuts Into Amazon Shares
By Troy Wolverton
TheStreet.com Staff Reporter
01/27/2004 07:23 PM EST
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Updated from 5:24 p.m. EST
Amazon.com (AMZN:Nasdaq - news - research) shares plunged in after-hours trading as doubts about the company's price-cutting strategy seemed to overwhelm news of its first-ever profitable year.
On a conference call with analysts and investors, company officials fielded a flurry of calls about price cuts. While Amazon posted record revenue and earnings in the fourth quarter, the company's gross margin declined significantly in the quarter on a combination of lower prices and more customers taking advantage of its free-shipping promotion.
Amazon is consciously making the choice to cut prices on its products rather than to spend money on marketing, believing that effort to be a much more efficient driver of sales, company officials said on the call. Noting the increase in the company's bottom line, they argued the strategy is working.
"We view [the price cuts] as a great investment in our business," company CFO Tom Szkutak said on the call.
But Szkutak's comments didn't seem to reassure analysts, who repeatedly queried Amazon officials about whether continuously slashing prices was the right strategy.
"It sounds like they think their customers don't value convenience or selection all that much without low prices," said Joe Beaulieu, analyst at Morningstar. "Maybe their business is that price sensitive, in which case I'm a little worried about their long-term profitability." (Beaulieu doesn't hold Amazon shares and Morningstar doesn't do any investment banking.)
Investors seemed to have their doubts too. In after-hours trading Tuesday, Amazon shares were down $1.87, or 3.4%, to $53.79. In the regular session, Amazon shares closed down $1.29, or 2.3%, to $55.74.
Despite the fall, the company's stock is trading at 60.4 times analysts' 2004 EPS consensus of 89 cents, excluding charges.
The stock drop came despite a largely positive quarter. In the fourth quarter, Amazon earned $73.2 million, or 17 cents a share, on $1.95 billion in sales. In the year-ago period, the company earned $2.7 million, or a penny a share, on revenue of $1.43 billion.
Excluding a variety of charges, Amazon would have earned $125 million, or 29 cents a share. That pro forma result came in at the high end of the company's forecast, but merely matched analysts' estimates.
Analysts surveyed by Thomson One Analytics forecast that Amazon would earn 29 cents a share, excluding charges, on $1.87 billion in sales. In October, Amazon projected it would post $110 million to $140 million in operating income -- about 24 cents to 31 cents per share in pro forma profits -- on sales of $1.76 billion to $1.91 billion in the fourth quarter.
The company put first-quarter sales at $1.39 billion to $1.49 billion, above the Thomson One Analytics consensus estimate of $1.32 billion. Amazon put operating income at $80 million to $100 million. The consensus analyst estimate for Amazon's first quarter is 16 cents a share. Amazon did not provide EPS guidance.
The company's fourth-quarter profit marked the first time Amazon had recorded back-to-back quarters in the black. It also helped pull up the company's full-year results. For the full year, Amazon earned $35.3 million, or 9 cents a share, on $5.26 billion in sales.
Amazon boosted its 2004 operating income estimate to between $355 million and $455 million in the current year. Assuming the company's interest expenses remain roughly constant and its share count grows at the same rate as last year, that projection works out to be about 81 cents to $1.06 a share in pro forma income.
Amazon had previously predicted that it would post operating income of $315 million to $415 million on sales of $5.75 billion to $6.25 billion. Analysts forecast the company will earn 88 cents a share, excluding charges, on $6.21 billion in sales.
But Amazon's report wasn't all positive. The company's gross margin, which represents the difference between what a company charges customers for its goods and what it pays suppliers for them, fell to 21.9% of sales from 23.5% in the year-ago period. Part of the decline was fueled by the company's free-shipping promotion, which the company made permanent last January. Amazon's loss from the promotion grew 86% year over year to $56 million.
Meanwhile, as it had throughout the year, Amazon benefited in the fourth quarter from the decline of the dollar vs. other major currencies because that change in exchange rates increases the nominal dollar value of its sales.
In the fourth quarter, the dollar's decline added about $98 million to Amazon's revenue and about $6 million to its operating profits, Szkutak said on a conference call with members of the press. For the full year, the change in foreign exchange rates added about $232 million to Amazon's sales and about $14 million to its operating profits, he said.
The company also saw a disturbing rise in inventories. Amazon's inventories jumped 45% year over year to $293.9 million. In contrast, the company's 2003 sales grew about 34% over 2002. |
