Well, lets put it this way. This will not help Amzn's health.
>
Washington, Feb. 18 (Bloomberg) -- The Securities and Exchange Commission may make Amazon.com Inc. and other Internet retailers change their accounting practices in a way that could cut ``gross profit' figures, which many consider an important indicator of business potential.
The SEC is questioning Amazon.com, eToys Inc. and others about how they account for the cost of distribution centers where goods are stored and packaged for delivery, according to regulatory filings. So-called fulfillment costs aren't now counted when these Web retailers calculate gross profit -- a measure of the company's sales minus the cost of selling its goods.
The SEC has told companies it may make them count some distribution expenses as a ``cost of sales,' subtracting them before arriving at the gross profit number on financial statements, Amazon.com said in a filing. That change, for Amazon.com and others, could turn gross profits into multimillion- dollar gross losses.
``If the SEC decides that fulfillment costs have to be put above the line, that will really get a lot of investors' attention -- and not exactly in the way that the e-tailers want them to take notice,' said David Zale, a senior Internet analyst at Sands Brothers & Co.
Amazon.com, eToys and other Web retailers now put fulfillment costs in the category of sales and marketing expenses, which aren't included among costs that go into the gross profit calculation.
Shifting the fulfillment costs to a different line on financial statements wouldn't have any impact on a company's sales, or on its net profit or net loss.
Few Web retailers actually turn a bottom-line net profit, though. Because of that, investors and analysts may look to the gross profit figure as an indicator showing how well a company can make money from its basic business operations.
Looking Better
``It's easy to see what the SEC is worried about,' said Ira Weiss, an accounting professor at Columbia University's Graduate School of Business.
``Because they're startup companies, a lot of these Internet retailers are spending a lot of money on marketing right now, and the expectation is that five years from now that won't be the case anymore,' Weiss said. ``So if they can shove all these costs into (categories) that analysts will think are only temporary, then it could look like they're doing better than they are.'
Seattle-based Amazon.com, the biggest Internet retailer, said in a disclosure filing that the SEC ``has advised us that it may decide to require that certain distribution center costs be classified as costs of sales.' EToys, the Santa Monica, California, Internet toy store, also has disclosed the SEC is reviewing its classification of fulfillment costs.
An SEC spokeswoman declined to comment about whether the SEC will insist on changes, or what other companies are being asked about the practice.
`Strictly' Presentation
Steven Schoch, eToys' chief financial officer, said it won't make a big difference if the SEC requires a bookkeeping change.
``It's strictly a presentational matter,' he said. ``It won't have an impact on our aggregate numbers for sales, operating profit, net profit or cash flow.'
According to estimates in an SEC filing, Amazon.com spent about $107 million on fulfillment in the fourth quarter of 1999, or about 60 percent of the $179 million it reported for marketing and sales expenses. If all those distribution expenses were labeled as costs of sales instead of marketing expenditures, Amazon.com's $88 million gross profit for 1999's fourth quarter would turn into an almost $20 million loss.
Analysts also look at a company's gross margin, which shows the percentage of sales that were counted as gross profit. In Amazon.com's case, the change being considered by the SEC would have cut its fourth-quarter gross margin to a minus-3 percent, from 13 percent, Zale said.
``That's a big swing,' Zale said.
Earlier this month Amazon said it expected its gross margin, as now calculated, to ``approach 20 percent' in the first quarter of this year and to continue increasing during the year.
Standard Method
Amazon spokeswoman Patty Smith declined to comment on what effect the SEC's contemplated change would have on the company's gross margin. ``We're not going to speculate,' she said. ``But the accounting method we're using is standard among retailers online and traditional brick and mortar retailers.'
Kevin Silverman, an ABN Amro analyst, agreed, saying catalog retailers have traditionally reported distribution and fulfillment costs along with marketing expenditures in a category called ``selling, general, and administrative' costs, or ``SG&A' expenses.
``It's always been that way,' Silverman said. ``How you get the product to the customer has always been an SG&A expense. If e- tailing is an evolution of direct marketing, why shouldn't they have an accounting treatment that's the same as traditional direct marketers?'
Questions about fulfillment costs are the latest in a series of accounting concerns raised in connection with Web retailers and other Internet companies, who are blazing new business trails where traditional accounting rules don't always provide clear guidance.
Timothy S. Lucas, chairman of the Financial Accounting Standards Board's task force on emerging issues, said accounting for Internet retailers is a new field where ``things are still very fluid and unformed.' The task force is slated to take up the question of how to account for fulfillment costs, perhaps as soon as mid-March, Lucas said.
Feb/18/2000 12:42 |
