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THE DAY AHEAD: Slowing sales force Amazon&#039&#039s profit promise

COMMENTARY -- It took slowing sales, a weak economy, impatient investors and some pain, but Amazon appears to be hell-bent about reporting an operating profit a year from now. Nothing like an oncoming train wreck to force Amazon to change its identity.

CEO Jeff Bezos said on a conference call that Amazon (Nasdaq: AMZN) had been planning to be profitable in the fourth quarter of 2001 the whole time. Amazon had resisted the temptation to answer the profitability question because it would have been irresponsible, he said.

Sure it would Jeff.

Bezos never had to put a deadline on profitability because the company had investors trained to watch revenue growth. Now that sales growth is slowing, Amazon has to change the game. It's about a hypothetical bottom line now. "We'll sacrifice top line growth for profits," said CFO Warren Jenson.

Amazon has no choice. Amazon's sales growth has slowed dramatically. The company projected that its revenue will grow 20 percent to 30 percent year-over-year in 2001 from $2.76 billion in 2000 to $3.3 billion to $3.6 billion. The target used to be $4 billion. Revenue in the first quarter will be up a mere 13 percent from a year ago -- maybe.

Amazon now looks like any other retailer, and the company may have hit the saturation point among Internet households. Its core books, music and video business had anemic sales growth of 11 percent in the fourth quarter. Analysts were expecting at least 20 percent. For comparison, Barnes & Noble said sales grew 6 percent at its superstores during the nine-week holiday period.

When companies face slowing sales, they focus on the bottom line. That means Amazon is really in deep -- it doesn't have a bottom line.

So we get a promise that profits are coming. Really, they are.

Luckily, Amazon is actually backing up its profit talk with some action. Notably, Amazon is cutting 15 percent of its work force, closing a distribution center and a call center, and lowering sales targets.

Meet the new Amazon. "The new Amazon is slow growth," said Faye Landes, an analyst at Bernstein. "Sales just aren't growing that fast. You don't see Wal-Mart lowering projections like that."

Landes is on target. Amazon cut its 2001 revenue target by $500 million. That's why you're going to see a lot of shareholder turnover today. The growth folks are gone.

The new Amazon ...

  • says productivity is everything;

  • says it will be profitable no matter what in the fourth quarter;

  • says it will sacrifice growth for the bottom line;

  • and blames the economy for any sales problems it may have.

That last point is worth noting. Amazon used the "it's the economy, stupid" excuse way too much last night on its conference call. Using the slowing economy as a crutch, Amazon said its sales growth will plateau. Analysts weren't buying it.

"I don't think the economy can explain everything," said Shawn Milne, an analyst at WitSoundView. "I think they realize they can't keep disappointing on the top line."

Simply put, Amazon was using the economy to lower revenue targets to something it could actually hit. The new targets also imply that Amazon has no idea what will happen to its business. Amazon's visibility is low for 2001 -- despite being top dog in e-commerce.

The next big question is whether Amazon can deliver an operating profit in the fourth quarter without additional cost cutting. A betting man would expect some more pain ahead. Amazon's figures just don't add up to a fourth quarter profit excluding one-time items.

  1. Gross margin at Amazon's consumer electronics store was about 8 percent at best, according to Prudential estimates. Subtract fulfillment cost and free shipping promotions and Prudential estimates Amazon's margin was negative 10 percent, and on a fully allocated cost basis, negative 42 percent in the quarter. Amazon's electronics business "will ultimately drag down the economics of the entire business," said Prudential analyst Mark Rowen.

  2. By Prudential's tally, 52 percent of the 14.1 million customers who were active in the fourth quarter of 1999 made a purchase over the following 12 months. The average lifetime of an Amazon customer is little more than two years. For catalog retailers, the average lifetime of a customer is 51 months.

  3. Cost cutting can also disrupt the business. If employee morale goes down because of layoffs, will Amazon folks be as quick with customer service? Will delivery times suffer?

  4. Wall Street wants growth. Amazon can't juice sales and be profitable. Wall Street wants both. Once the novelty of an operating profit wears off, Amazon will be measured by sales growth again. Amazon can't have long-term profitability without sales growth. For 2000, sequential revenue growth for the first four quarters of the year was 95.4 percent, 83.8 percent, 79.3 percent and 43.8 percent, respectively. That trend is headed in the wrong direction.
TDAIN


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