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Technology Stocks : Amazon.com, Inc. (AMZN)
AMZN 247.70+1.3%10:35 AM EST
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To: spal who wrote (81235)10/19/1999 6:31:00 PM
From: Bill Harmond  Read Replies (1) of 164684
 
A. Bricks & Mortar.

B. Without cash flow a company isn't really profitable. It doesn't generate any income. There's nothing left over after expenses. It's like a person living paycheck to paycheck. There's no payback to shareholders on their investment. No chance for dividends or retained earnings.

C. The reason Barnes doesn't generate free cash flow is the buildout of new stores. It's the only way they can grow, because book sales don't increase much as a category. As Lizzie has pointed out so well, each store serves only a small market. Additionally, Barnes must spend large sums keeping, stocking and maintaining their fashionable, expensive existing retail space, which is essentially over-capacity.

There's really no operating leverage in the Barnes model...the only way to increase top line is to build. If they change location or mix, it costs them a fortune. They never know that's they've overbuilt until it's too late. On the other hand, Amazon operates from a few bare-bones warehouses (remember, Barnes must have warehouses, too) that serve the entire country. Amazon can change its merchandising and product mix by just changing it's website. It can also offer far better selection. All these advantages add up to a better cash model for Amazon.

Right now Amazon is in the throws of a very expensive buildout and customer-grab. That's why it doesn't generate free cash yet. My bet is that Amazon will reach the operating mass to achieve free cash flow, while Barnes is stuck with building more and more selling space.
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