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To: Mike M2 who wrote (40666)	2/18/2000 5:04:00 PM
From: Les H	Respond to of 99985

SEC could turn e-tailers' paper profits into losses by Judy Mathewson Bloomberg News WASHINGTON - The Securities and Exchange Commission may make Amazon.com and other Internet retailers change their accounting practices in a way that could cut "gross profit" figures, considered an important indicator of business potential. The SEC is questioning Amazon.com, eToys and others about how they account for the cost of distribution centers where goods are stored and packaged for delivery. 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. 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 could turn gross profits into multimillion-dollar gross losses. 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 effect 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 of the health of the company's basic business operations. 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. According to estimates in an SEC filing, Seattle-based Amazon.com spent about $107 million on fulfillment in the fourth quarter of 1999, about 60 percent its reported 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, said David Zale, a senior Internet analyst at Sands Brothers & Co. "That's a big swing," he 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. Amazon spokeswoman Patty Smith declined comment on the change but said "the accounting method we're using is standard among retailers online and traditional brick and mortar retailers." Kevin Silverman, an ABN Amro analyst, agreed. "It's always been that way," Silverman said. "How you get the product to the customer has always been a (marketing) expense."