To: Ken Holbert, Jr. who wrote (23525 ) 10/28/1998 11:35:00 PM From: Rob S. Read Replies (1) | Respond to
The difference is in how the earnings are accounted. Under GAP where the recent acquisition costs a more fully taken against current earnings, the loss was 90c. But under the methods that analysts have been using to estimate the earnings, the loss was in-line or lower than estimated. Sure it may be junk accounting and forecasting, but an argument can also be made that the "grand plan" is still in tact. While the loss appeared to be great, the loss was realy in future shareholder value due to increased liquidity when the new shares come on the market. Amazon was able to pay for the acquisitions and pay out stock options to employees in highly inflated stock. One thing that was impressive is that the company is NOT burning through cash reserves - they only used approx. $1.2 million according to Covey. That's pretty incredible considering the paper losses. Now a lot of that should be questioned; the company maintained accounts payable of 46 days. Payment for purchases in the publishing industry (also for music) is one of the most generous of any industry - 30 to 45 day terms are normally extended and lots of arrangements for returns. Amazon has been able to take advantage of this fundamental of book and music merchandising to help finance their high of growth. While sales are growing rapidly this provides a postive credit flow because of the credit card cash in advance type payment from Amazon's customers. This is something I am fairly familiar with (Glenn also knows about something similar from his retail experience in Diamonds) because I have built a business plan for my own internet business and negotiated arrangements with vendors. While sales are zooming, the positive credit-flow situation actually distorts the picture and shields the effects of the paper losses. The company may be burning through money but as long as the credit bubble keeps getting bigger, the drain on cash reserves doesn't show up. In summary, it looks great short-term but the paper losses will tear into reserves sooner or latter unless off-set by future profits (if they ever develop).
