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Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: Gary Korn who wrote (125309)	5/20/2001 11:55:06 AM
From: Glenn D. Rudolph	Respond to of 164684

Profitable or Not? It Depends on Who's Measuring It will dominate retailing around the world. Or it will be the Internet's most spectacular flameout. There are few companies that provoke as wide a range of passionate predictions as Amazon.com. And that is hardly a surprise; few companies have tried to do so much so fast while losing so much money. The current state of Amazon's finances only intensifies the puzzle. Like many other technology and retail companies, Amazon now says its sales will grow far more slowly this year than it had expected. But at the same time, its profit margins are widening and its expenses are falling faster than it and others expected. That makes it more likely that the company will meet its goal of breaking even, by its idiosyncratic measure of pro forma operating profit, in the fourth quarter of 2001. That is not the toughest standard it could set. Amazon's pro forma profit excludes $33 million a quarter in interest on $2.1 billion in debt, severance payments and other expenses from restructuring, and accounting charges related to investment losses, stock options and acquisitions. Moreover, sales volume drives Amazon's profit, so the holiday season should be its best. (It will not say if it will remain profitable next year.) Then again, its pro forma fourth-quarter loss was $175 million in 1999 and $60 million in 2000, so there is room for improvement. There are signs that Amazon is moving in the direction it wants. Amazon's brightest area is gross profit, or revenue minus the cost of goods sold. Gross profit is reduced by any inventory write-offs and by shipping charges, because shipping fees are included in revenue. Amazon's gross profit, which was 18 percent in 1999 and 24 percent in 2000, increased to 26 percent in the first quarter of this year. The margin may be helped by Amazon's effort to cut inventory and to further reduce the number of orders shipped in more than one box. The company's other costs are declining somewhat. It is sharply cutting back on marketing, and its fulfillment costs ˜ mainly the expense of running its warehouses ˜ were at 14 percent of sales in the first quarter, down from 17 percent in 2000. Warren Jenson, Amazon's chief financial officer, pointed out that total expenses for United States operations decreased by 9 percent in the first quarter, from the previous year, even as sales increased 11 percent. While analysts expect a small loss in the fourth quarter, rather than the break-even that Amazon predicts, many say the goal is within reach. The far bigger question is whether Amazon can return to growing without sacrificing profitability. Its international operations are still a drag, losing $34 million in the first quarter. And it is not clear when they will be profitable. Growth in the United States, meanwhile, is slowing. In the first quarter, its book, music and video sales, still its largest segment, increased by only 2 percent. Analysts have also started to notice a distressing churn in its customer base. One-third of its 30 million customers have not made purchases in the last year. Many critics contend that Amazon has fundamentally picked an impossible proposition. "Their model just doesn't work," said Claire Gruppo, president of Gruppo Levey & Company, a New York investment bank specializing in direct marketing companies. A good catalog merchant, she said, has fulfillment costs of 11 percent (compared with Amazon's 14 percent) and, more important, gross margins in excess of 50 percent (versus Amazon's 26 percent). Mr. Jenson counters that with high volume and rapid inventory turnover, Amazon can make money on far lower gross margins than the typical catalog company. "You can either charge a lot and sell a few units, or you sell a lot of units with a small margin," he said. "We think the latter is a bigger business." SAUL HANSELL nytimes.com /----------------------------------------------------------------- Visit NYTimes.com for complete access to the most authoritative news coverage on the Web, updated throughout the day. Become a member today! It's free! nytimes.com?eta