I think this article sums up Amzn pretty well without the hype. A $15.00 price target by the analyst's seems to be the norm until the next 2002 Xmas rush.
>>The final numbers began rolling in the first week of January, but Amazon.com founder Jeff Bezos had an inkling far earlier. Daily sales and operating reports — all the figures — seemed to move in the right direction.
"Each day that went by," Bezos said yesterday of the company's holiday quarter, "our confidence level increased."
In the end, the Seattle-based online retailer, one of the poster children of the Internet, surpassed even Wall Street's expectations, recording a net profit — one without qualifications — for the first time in its six-year history. The news sent its stock up 24 percent yesterday to $12.60.
"The results were better than anything I or anyone else had expected," said Bear Stearns analyst Jeff Fieler.
Through a combination of improving its operations and offering better prices to customers, Amazon reached, if but for a quarter, a financial state that has eluded the thousands of e-commerce companies that have failed over the past few years.
Now the company faces the task of sustaining itself, resting on its belief that it has achieved a size that would finally prove the power of e-commerce.
"They've proven that the business model works, but only with scale," said Deutsche Banc Alex. Brown analyst Jeetil Patel. "There are only a few companies at that level of scale, and Amazon is one."
Yesterday marked a surprising end to a year that started with a layoff of 1,300 employees, or 15 percent, and the closure of two distribution centers and its original customer-service center, calling into question whether Amazon would ever do more than bleed money.
At the same time it announced layoffs, the company told Wall Street it planned to post a pro forma operating profit in the fourth quarter — its first attempt to set a timeline toward profitability.
A pro forma operating profit serves as an indicator of how well the company picks, packs and ships items. It excludes from income statements certain non-cash and non-recurring items such as the stock it gives employees (non-cash) or the cost to close a distribution center (non-recurring).
Even then, analysts wondered whether its goal was attainable, amid a backdrop of slowing sales and weak consumer spending.
Surprising numbers
Yesterday, Amazon posted a fourth-quarter net profit, which takes into account all income and expenses, of $5.1 million, or 1 cent per share, compared with a net loss of $545 million, or $1.53 per share, a year ago.
The company racked up $1.12 billion in sales, a 15 percent increase vs. a year ago and its first-ever billion-dollar quarter. For all of 2001, Amazon lost $567.2 million on $3.1 billion in sales.
Still, yesterday marked a milestone for the largest and oldest online retailer left standing — a point the company reiterated.
In forecasting its prospects, Amazon yesterday said it would have more money coming in than going out of its operations for all of 2002. However, with expenses that go beyond these operations, it would still lose money.
While the company said it expects to post a $30 million pro forma income from operations for fiscal year 2002, it has yet to forecast when it would be able to sustain its net profit over time.
"In my own mind, this is an important juncture for the company," said Amazon Chief Financial Officer Warren Jenson, "but we, by no means, are declaring victory."
Jenson was careful to steer attention away from the company's first net profit to its pro forma operating profit, the goal it set a year ago. Here's why:
During the quarter, Amazon posted a $59 million pro forma operating profit compared with a $60 million pro forma operating loss the year before. Even the most optimistic analysts had forecast a pro forma operating profit of only $15 million.
If you account for the $35 million in interest payments each quarter that go toward the company's debt, it has more than $2.15 billion in long-term debt, it posted a pro forma profit of $35 million or 9 cents a share, compared with a pro forma loss of $90 million or 25 cents a share, a year ago.
Analysts polled by Thomson Financial/First Call had this number pegged at a loss of 4 to 8 cents.
Taking into account all expenses and income, the company recorded the $5.1 million net profit that turned heads yesterday. This number, however, includes a $16.3 million gain for fluctuations in the euro, the currency that underlies some of Amazon's debt. When the Euro falls vs. the dollar, the company's debt becomes smaller and it records a gain and vice versa.
Fieler of Bear Stearns said it was a significant improvement any way you slice it: a slight net profit compared with a $545 million net loss the year before. "Let's not quibble over which side of the zero they were on," he said.
Focus on operations
The fourth-quarter wasn't all serendipity, either.
Amazon for the past year and a half has been steadily improving operations, with the biggest gains visible in the fourth quarter, the most important for many retailers.
Jenson said the company began preparing for the holiday quarter the year before by turning off half of the sorting capacity in its distribution centers. When the company ran more orders through a smaller system, it helped workers get used to the feel of its busiest quarter.
The company also ran more intense, periodic simulations, where it practiced for six-hour periods what it would be like during the holidays. It reduced by 4,000 the number of employees working on its peak day during the holidays, opting for more experienced workers instead of more hands on deck.
The company focused on inventory accuracy, meaning the right item is in the right bin at the right time. This decreased its defect rate by 50 percent compared with the year before. Other technology improvements helped the company manage the flow of its inventory through the centers that filled orders, and it reduced the number of split shipments by anticipating what inventory it would need to satisfy customer demand.
Meantime, Amazon's decision to deeply discount books with a cover price of more than $20 seemed to help it attract more customers. The company's books, music and video segment increased sales 5 percent to $538 million; revenue had declined the previous two quarters. International sales were also strong, growing 81 percent to $262.4 million.
Jenson said the company has opted for the strategy of successful large retailers such as Costco and Wal-Mart: Develop the lowest cost structure possible, pass savings back to customers in the form of lower prices, then drive volume.
More promotions
The company is making a further bet. Yesterday, it began offering "super-saving shipping," free shipping on orders over $99 year-round, hoping to drive sales higher.
While Bezos said the promotion would be expensive short-term — in the fourth quarter, shipping revenue added $125 million to overall sales — he said it would helpful to the company down the road.
Bezos said the company accounted for the investment in its current quarter's guidance to Wall Street, which it told to expect between $775 million to $825 million in revenue and a pro forma loss from operations of up to $16 million. The first quarter is traditionally a retailer's weakest quarter.
Lisa Rapuano, director of research at Baltimore-based Legg Mason funds, Amazon's largest institutional shareholder with 4.8 million shares, said the quarter proved to Wall Street three things: Price cuts work; the company could reap a decent operating margin, even while cutting prices; and it could further reduce the cost of filling orders.
Wall Street, she said, can finally envision a profitable Amazon: "Those things we know are possible now."
Monica Soto may be reached at (206) 515-5632, msoto@seattletimes.com.
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