October 28, 1999
Amazon Says Its Losses Could Grow in the Fourth Quarter
By SAUL HANSELL
mazon.com, by far the biggest merchant on the Internet, reported Wednesday that its losses in the third quarter were slightly less than analysts had expected. But the company also warned that it planned to lose far more than it had previously indicated in the fourth quarter, as it tripled its spending on marketing and advertising to compete vigorously this Christmas.
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That strategy indicates how quickly Amazon has moved from David to Goliath. When it started in 1995, it was an upstart bookseller taking on Barnes & Noble. Now it offers a wide range of merchandise, including electronics, and is host to auctions and storefronts for other merchants.
Which means it is now hearing footsteps. Jeffrey P. Bezos, the company's founder and chief executive, said Amazon had to defend itself from the hundreds of newer Internet stores, flush with cash from venture capitalists and public stock offerings.
"All you have to do is watch "Alie McBeal" to see that every commercial is a dot-com company," Bezos said in a conference call Wednesday with analysts. "We don't know if we need to triple our marketing spending, but we know we don't want to take the chance."
Amazon declined to say how much the marketing blitz would cost, but analysts estimated it would be well in excess of $100 million in the next three months. Much of the spending, Bezos said, would be in the form of discount coupons, typically in the form of e-mail messages, inducing its customers to make purchases in its newer product areas.
Amazon has become the archetype of the classic Internet business model: lose lots of money to grow very quickly. But even as other Internet pioneers, like Yahoo, have started to make a profit, Amazon's losses have continued to widen -- even as its sales and customer base make it a big business in its own right.
In the third quarter, the company lost $197 million on sales of $356 million. A year earlier, it lost $45 million on sales of $154 million. This year's third-quarter loss included $111 million in costs the company said were one-time charges related to acquisitions, investments and stock-based compensation.
Excluding these charges, on an operating basis, the company lost 26 cents a share. That is slightly better than the 28 cent loss that analysts had expected.
Even so, analysts Wednesday expressed frustration that Amazon had significantly changed its forecast for the fourth quarter.
"They had indicated that their losses would decline, ever so slightly going forward," said Lauren Levitan, an analyst with Robertson Stevens. "Now they tell us that won't be the case."
Amazon's stock, which fell $5.31 to $75.93 in trading Wednesday on the Nasdaq, fell even further in after-hours trading, to $72.75.
Faced with repeated questions by analysts about why the company was not moving more quickly toward profitability, Bezos said that the company keeps discovering new business lines it wants to enter.
"The further we go into this, the more we find new things to do," he said. "We think it would be really foolish to slavishly commit to plans we made in the past."
The company did say that in the fourth quarter it expected its book business in the United States to become profitable for the first time and that products other than books would likely approach half of all sales.
Analysts seized on that prediction -- the first ever in which Amazon used the word "profit" -- as some consolation to investors who are wearying of Amazon's ever widening losses. "If you can see books are profitable, you may be willing to believe the model works and they will be able to duplicate this in other areas," said Henry Blodget, an analyst with Merrill Lynch.
Blodget said he expected the company's shares to decline further, as all but the true believers among investors get out of their positions.
"They have said from the very beginning they are going to invest everything for the long term," he said. "If you think this is just words, then sell."
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The company has a huge marketing blitz on its wish list for Christmas.
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Amazon said it expected sales to increase significantly in the fourth quarter, but it also predicted the gain would be entirely offset by the increase in marketing spending and additional increases in the cost of inventory, warehouses and shipping.
Amazon is spending more than $300 million to build seven automated warehouses around the United States. Bezos conceded that warehouses would not be operating at peak efficiency and that the company would have to cover the delays by paying for express shipping.
The company also said it had nearly quadrupled its inventory from the beginning of the year, to $118 million, and would increase it even further to make sure it had goods on hand for the Christmas peaks.
While Bezos conceded that if the company's forecasts were wrong, it might have to take big markdowns to sell excess inventory, he added, "We want to minimize the risk we will let down customers."
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