Price wars give Amazon edge

The e-tail giant posted a net loss of $35 million, or 9 cents per share, on sales of $851 million. In the year-ago period, the company lost $170 million, or 46 cents per share, on $639 million in sales.

On a pro forma basis, which excludes the amortization of goodwill, stock-based compensation and restructuring expenses, Amazon posted a profit of $400,000, or less than a penny per share. Wall Street analysts surveyed by First Call expected the company to lose 4 cents per share on this basis.

Amazon was able to improve its results based on its pricing strategy, Jeff Bezos, the company's chief executive officer, said in a statement.

"We?ve lowered prices five times over the last 15 months, and simply put, it?s working," he said.

But the results were not so clear-cut for sales of Amazon's core media products. The company sold $412 million worth of books, CDs, DVDs and videos in North America in the quarter, posting a pro forma operating profit of $43 million on these sales. Compared with the same period a year ago, revenue in this area was up 17 percent, and operating profits were up 64 percent.

However, compared with the second quarter, Amazon's sales of media product were about the same, and its operating profit actually declined from the second quarter's $49 million.

Amazon has been in a price war with resurgent Buy.com, which has marked its books down to 10 percent below Amazon's prices. While both companies have free-shipping offers, Amazon requires customers to purchase $25 worth of products to get free shipping. In contrast, Buy.com offers free shipping on many products with no minimum purchase.

Free-shipping fallout
Amazon saw its shipping revenue stagnate and losses mount as a result of the free-shipping offer, said Mark Peek, the company's chief accounting officer. The e-tailer's shipping services lost $10 million on $73 million in revenue in the quarter, compared with a loss of $2 million on $74 million in revenue in the year-ago period.

"We're trading gross margins for business from our customers," Peek said.

Despite the shipping losses, the company has decided to extend its free-shipping offer through the holiday season, Peek said.

Shipping and books weren't the only disappointments in Amazon's results. The company's services business also was static in the quarter. Amazon's services business includes its hosting of Web stores for companies such as Target, Borders and Circuit City, as well as its used goods marketplace and auctions. The services business has represented an opportunity for Amazon to earn revenue at little cost, because it typically doesn?t have to hold inventory and merely gets paid for providing computer and marketing services.

For the quarter, Amazon posted a pro-forma operating profit of $7.6 million on services sales of $46.8 million. In the same period last year, Amazon earned $7.8 million on services sales of $46.2 million.

Peek blamed the stagnation on the expiration of a number of high-margin advertising deals that were signed in 1999, during the dot-com boom.

"We're very bullish on services," he said. However, he added, "we expect (services) revenue will stabilize, but we expect margins will go down."

To be sure, Amazon did have a number of bright spots in its report. Its international operations, for instance, surged during the quarter. The company posted a pro forma operating profit of $61 million on international sales of $264 million in the quarter. That's compared with a pro forma profit of $28 million on international sales of $138 million in the year-ago period.

The company also forecast a cheery holiday season. Amazon expects to post a pro forma operating profit of between $70 million and $95 million on sales between $1.3 billion and $1.4 billion.

In 2003, the company expects its net sales to grow by more than 10 percent. Amazon projects that its pro forma operating profit will be more than $200 million.

Amazon shares were up 11 cents to $19.86 at the close of Nasdaq trading Thursday. The stock was down 66 cents to $19.20 in after-hours trading on the Island ECN.

Amazon said the Sept. 11 terrorist attacks last year affected the year-over-year comparison of its third-quarter results. The e-tailer estimated that its sales in the third quarter last year were about $25 million to $35 million lower than what they would have been because of the attacks.