Market Place: Amazon, Facing Slowdown, Cuts 1,300 Jobs
January 31, 2001
By SAUL HANSELL
Faced with a sharp downturn in its sales growth, Amazon.com said
yesterday that it would close two operations centers and lay off
1,300 people, or 15 percent of its work force.
With those job cuts, Amazon's biggest layoffs ever, the company
said it expected to show an operating profit in the fourth quarter
of this year. Although that does not mean Amazon will necessarily
turn a profit based on conventional accounting methods, it was the
first time the company promised investors a profit of any kind ˜ a
crucial milestone in an market increasingly skeptical that online
retailing is viable even for Amazon, operator of the largest Web
store.
Three weeks ago, Amazon announced that its sales would barely meet
its goal for the fourth quarter of 2000, as profit margins had
fallen below target levels. Yesterday, the company released final
fourth-quarter results that were slightly better than its revised
projections.
Amazon lost $545 million in the fourth quarter, compared with a
loss of $323 million a year earlier. The loss included charges of
$339 million for writing down the value of its investments in and
acquisitions of Internet companies. Sales were $972 million in the
quarter, up 44 percent. Sales in 1999 increased 130 percent from
1998.
Rather than conventional measures of profits or losses, Amazon
prefers investors to use its measure of "pro-forma" income, which
excludes noncash charges like the cost of options and some other
items. On that basis, Amazon lost $90 million, down from a loss of
$185 million in 1999. That was a loss of 25 cents a share ˜ one
cent better than analysts had expected after revising estimates in
the wake of Amazon's recent warning.
The company said that its losses had fallen to 6 percent of sales
in the fourth quarter, down from 26 percent of sales a year
earlier.
Amazon said yesterday that its sales for 2001 would be $3.4
billion to $3.5 billion, down from the $4 billion it had forecast
last October. At that pace, Amazon's full-year sales would increase
20 percent to 30 percent. For all of 2000, its sales increased 68
percent to $2.76 billion. The company attributed the slowdown to a
cooling economy and reduced consumer interest in online shopping.
Investors seemed to shrugged off the cost- cutting moves and
profit promises, which came after the market closed. Amazon's
shares fell 69 cents, to $18.25, in after-hours trading.
"There was nothing new," said Lauren Levitan, an analyst with
Robertson Stephens. "The cuts they made are steps in the right
direction, but they don't improve the fundamental economics of
their business."
Ms. Levitan said the market had expected Amazon to aim for
profitability by the end of this year. But she said that since the
company was now forecasting an especially slow first quarter ˜
sales growth of 13 percent to 22 percent ˜ its success would depend
on its performance later this year. As a result, she said,
investors would see little reason to buy the company's stock.
But Anthony Noto, a Goldman Sachs analyst, said he saw the report
as an indication that Amazon's profitability goal was realistic.
"They have improved every single metric I was following," Mr. Noto
said. For example, he said, inventory levels and fulfillment costs
have been declining while gross profit margins have increased. And
yet, Mr. Noto hardly expects Amazon's shares to take off. He has
set a target price of $25 in 12 months.
To cut costs and streamline its network of operations centers,
Amazon said yesterday that it would close its distribution center
in McDonough, Ga., which it had opened two years ago, as well as
its customer-service center in the company's home town, Seattle.
The company said it would also begin operating its original
warehouse, in Seattle, only during peak holiday periods.
These moves will eliminate 450 jobs in Georgia and 400 customer
service jobs in Seattle. The company planned to cut an additional
450 jobs in its headquarters. The cutbacks will result in a charge
of $150 million in the first half of the year.
Seattle had been the center for a union organizing movement at
Amazon, but the company said that fending off the union was not a
factor in its decision to cut jobs there. Rather, Seattle has
higher costs than its other service facilities in West Virginia and
North Dakota, the company said. Hourly employees in Seattle and
Georgia will be given the opportunity to transfer to other
locations.
The company said it made an operating profit selling books, music
and videos in the United States of $39 million, but lost money on
other products and in overseas sales. And even the operating profit
profit came at the expense of much slower sales growth, as Amazon
raised book prices substantially. Sales of books, music and videos
in this country grew by 11 percent, to $511 million, compared with
a 82 percent growth rate a year earlier.
"We have definitely made a choice to trade profitability for
growth," Warren Jenson, Amazon's chief financial officer, said
yesterday.
Amazon's other businesses in the United States, including
electronics, kitchen supplies and tools, lost $56 million, down
from a loss of $128 million a year earlier, even as sales more than
doubled to $315 million.
Overseas, sales doubled to $145 million, but Amazon's
international operations lost more money, $44 million, than in the
fourth quarter of 1999, when it lost $30 million.
With Amazon continuing to lose money, investors have been focused
on how quickly the company is using its cash. In 2000, it used $265
million of its cash, of which $135 million went to capital expenses
like building warehouses and buying computers. That left a year-end
2000 total of $1.1 billion in cash, with the company expecting to
use an additional $200 million this year.
The year-end numbers, however, overstated Amazon's available cash.
Like most retailers, it is paid immediately by customers over the
holiday selling season, but has several months to pay its vendors.
By the end of the current quarter, as a result, Amazon expected to
have only $650 million in cash, although it expected to increase
that to $900 million by the end of the year.
On a calls to investors, Mr. Jenson denied reports that the
company was seeking additional financing.
"Unless we seek to raise cash to further our financial
flexibility," he said, "we have no need to do so."
Amazon said that it would allow employees with stock options that
are virtually worthless, because they are set at prices as high as
$100, to exchange them for options at a lower price. The new option
will be set at the lowest price for Amazon's shares from Jan. 1 to
Feb. 14. (The lowest price so far this year is $13.88.)
These new options will be available to sell over the next two
years, rather than the five years vesting schedule Amazon has
typically used. But employees who opt for the program will get
fewer new option than old options. The exact ratio varies, but on
average employees will get about 3 options for every four they
trade in.
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