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

To: Bill Harmond who wrote (17829)	9/22/1998 2:18:00 PM
From: Jan Crawley	Respond to of 164684

William, Wells Fargo is up almost $70 from our last discussion 3 weeks ago. I have 175 shares now and see $50 more before the merger completion.

To: Bill Harmond who wrote (17829)	9/22/1998 2:28:00 PM
From: IceShark	Read Replies (2) \| Respond to of 164684

William, Negative inventory carry is a one shot boost, usually never lasts for long before suppliers deal with it, and in AMZN's case is a misnomer of sorts due to the credit card fees on 100% of sales and shipping. I'm not sure what sort of deal AMZN has cut with the card companies, but the fee is 1.5% to 3% or so, pretty steep for say a 45 day credit term. It is a benefit, but not anything amazing. Wait till the States put 'em in their sights on sales tax, actually use tax. Given AMZN's high profile and supposed great computer systems, this might come sooner than anyone thinks. Then AMZN is a dead duck since another 6 to 7% cost will kill 'em. As they move to their own distribution facilities, this will move costs up, too. Not that anyone is smart enough to figure out any of this outside of the good buzzword "negative inventory carry". Regards, IS

To: Bill Harmond who wrote (17829)	9/22/1998 2:46:00 PM
From: Glenn D. Rudolph	Read Replies (1) \| Respond to of 164684

Sure. I'm trying to get an idea of fixed costs. Folks were telling me last week that two big advantages in the Amazon model are no leases (carried as debt on the balance sheet), and negative inventory carry. William, The typical jewelry store and mine included located in a shopping mall has rent equivalent to 6% of sales. My other store is in a shopping center and so traffic is less and rent is about 4.5% of sales. The typical jewelry store you see in a shopping mall on a corner location spends about $175K on fixtures. That was true with us too. However, the fixtures are almost fully depreciated now. The fixtures are good for almost ever if they are modern and they occasionally need maintenance such as new glass, plastic lamination, etc. My fixtures are carried as an asset on the balance sheet at about $35K at present. Inventory turn varies greatly from jewelry store to jewelry store. The average turn is three times per year. We only turn about 2.5 timers per year due to maintaining excess inventory. I am fortunate to be able to do that and it gives out customers a much greater selection than the competition. It is expensive since the capital could be used in the market, etc. However, jewelry is not like clothing, furniture, etc. so that the product does not depreciate do to changing styles. Sometimes a style of ring may go out of favor but one can take the stones out, recast the gold and have a new style with only the labor cost. Gold has not appreciate this year although with the labor to manufacture, typical appreciation is about 10% a year which is less than I pay on a bank line of credit. The diamonds appreciate much more quickly averaging 15% per year for the last 20 years. I make a conscious decision to over inventory for the reasons given above. Clothing, shores, etc. have different seasons and styling so my business does not fit into the typical category. You see clearance "sales" at season end for stores in these product lines. I want to add something further which also applies to Amazon via their purchase of many books through B & T and Ingrams. B & T and Ingrams do have distribution centers. They also maintain the inventory from the publisher. They in turn charge Amazon more per unit than the publisher would if Amazon bought the book title in bulk. I believe this explaines why Amazon is trying to inventory the better sellers and use B & T and Ingrams for the others. The jewelry business has a corresponding "model." Many jewelers including the large chain stores carry most of their inventory on memo. This means they do not own the inventory due to the fact they do not have the capital. This also means they can return the inventory that is not selling. The manufacturer is paying the cost to carry the inventory and typically the same product has a 10% higher cost if maintained on memo. Discounts are granted when the the inventory is purchased outright for cash. We believe we sell our merchandise at an average of 3% below our competition. However, ouir competition has their merchandise on memo so our gross margins are 7% higher. I am bearish on Amazon based on their business model although most analysts tout it as being an advantage. I really do not feel it is an error for then to advertise heavily to build awareness. The negative inventory carry as touted is true except that it is a one time event although grows as the top line grows. There is not advantage beyond that. When Amazon does a billion dollars per year is sales and let's assume it is linear but only for the discussion, they have the use of $64 million per month of the distributors money. However, this only increases when top line sales increase. It is a one time advantage but Amazon pays 7% more per month for their inventory. This is assuming they do not stock the best sellers. The more they stock, the closer they mirror the typical brick and mortar store model. That is why I believe the current business model does not work. That dos not mean they will never find one that does. This is just my opinion about the flaws in the majority of the analyst's reports. Your thoughts?? Glenn

To: Bill Harmond who wrote (17829)	9/22/1998 3:10:00 PM
From: Oeconomicus	Read Replies (1) \| Respond to of 164684

Folks were telling me last week that two big advantages in the Amazon model are no leases, and negative inventory carry. Bill, nice to see you looking at the fundamentals even if these arguments are old news at best. ;-) If you take a look at BKS or BGP financials, you should be able to figure out what portion of their revenues is absorbed by rent, fixed asset depreciation and mortgage interest (if any). However, there have been at least a few quotes from analysts and others posted here that debunk the myth that not having brick & mortar stores translates to better margins. If you consider the advertising value of a well located, visible store, not to mention the level of service, incremental revenue opportunities, and instantly gratified customers in a physical store, you must realize that a Web-only retailer has a big marketing job to do, on an ongoing basis, to generate revenues. The CFO and many analysts like to assume that these much higher marketing costs are only temporary, that they could simply stop spending on marketing whenever they deem it important to generate profits. Hence, the "EBITDMA" argument. Bull! On the issue of inventory turns, I'll agree that a Web only retailer SHOULD have better turns than a retailer with 1000 locations, but AMZN has already admitted that they underestimated the inventory needs of their business model and have built more warehouses to stock larger quantities of more titles. If you think about it, the alternative of ordering from publishers as customers order from AMZN or even letting publishers ship direct are not viable solutions if they expect large volumes. The longer you make people wait for the goods you are selling, especially small ticket impulse buys like books and music, the more likely they are to get in their cars and go get it from a local store. Obviously, for highly specialized titles that one would not find at the local retailer, one would not expect AMZN to provide same day shipment either, but any title you can get from AMZN in 3-5 weeks, you can get from the local Borders in about one week. And you'll pay less at Borders too. Which brings up the big cost disadvantage of AMZN - shipping. AMZN can not effectively compete on price without discounting by at least enough to offset shipping. For this reason alone, they will never achieve the kind of gross margins that BKS and BGP enjoy. Lower gross margins, higher marketing costs, and bigger than expected inventory costs. Did the folks you were talking to mention these things? Did they comment on the repeated downward revisions to earnings estimates (after repeatedly stating that they believe their estimates to be overly "conservative") or explain how that is consistent with a supposedly successful business model? The supposed "advantages in the Amazon model" are a myth. Regards, Bob