October 22, 2001 1:15 PM PDT

Amazon analysts say fourth quarter real test

For months Amazon.com has homed in on one goal--showing pro forma profits in the fourth quarter--and now Wall Street will see if the online retailer can still deliver the goods.

The Seattle-based e-tailer is scheduled Tuesday to report a third-quarter pro forma loss of 16 cents a share on revenue of $650 million, according to First Call, down slightly from second-quarter revenue of $667.6 million.

But those results will be just the opening act. Analysts are largely waiting for Amazon's outlook for the fourth quarter. Many Amazon watchers are skeptical that the e-tailer can report a profit--even one that excludes a host of expenses and charges.

Amazon executives were not immediately able to be reached for comment Tuesday.

Counter to what Chief Executive Jeff Bezos has said in recent months, analysts are predicting that Amazon will report a pro forma fourth-quarter loss of 7 cents a share with sales of about $1.1 billion.

"We think that it is possible that Amazon will lower its fourth-quarter revenue guidance," Bernstein analyst Faye Landes said in research note to clients.

There's good reason for that skepticism. The Sept. 11 terrorist attacks have cut into consumer confidence, which was waning already. Meanwhile, daily anthrax scares can't be doing wonders for a company that relies on outfits like the U.S. Postal Service and United Parcel Service to get goods to customers.

If Amazon does not report a profitable fourth quarter, look for the investors who have stayed with the stock to finally jump, said Kristine Koerber, an analyst who covers Amazon for WR Hambrecht.

"If they don't make it, those that are left out there with faith in the company will lose it," she said.

With its steadfast goal of turning a pro forma profit, the company has largely sacrificed growth, much to the chagrin of Wall Street.

Amazon's sales fell from $700 million in the first quarter to $667 million in the second quarter. If the company's revenue is in line with estimates, sales will have fallen for the first three quarters of 2001.

Although analysts said Amazon has been able to cut expenses, many say the company may be boxed in to the point where it has already trimmed all the expenses it can.

The company has cut most expenses "to the bone," as Landes put it.

Analysts say the company's fourth-quarter results are likely to be fueled by its services deals with partners such as Toys "R" Us, Borders Group, Expedia and Target.

Since cutting a deal last year to jointly operate an online toy store with Toys "R" Us, Amazon has signed similar agreements during the past six months. Under the terms of most of these deals, Amazon handles the Web site operations while the merchants oversee retail operations, such as merchandising, shipping and fulfillment. This allows Amazon to lower its costs, take a percentage of sales and, in some cases, earn a fee.

While those deals help boost Amazon's margins, it does not do much for sales growth and in the long run could hurt earnings, since Amazon has to share the sales made.

"It's great that Amazon is leveraging its technology," Koerber said. "But is it going to get them to profitability faster? I don't think so. I mean, we're talking a single-digit percentage of revenue."

If Amazon reaches fourth-quarter profitability, albeit one that excludes charges such as servicing the interest on its $2.1 billion debt, the company is still a long way off from swaying investors into believing in its core business: selling music, books and videos.

One reason is that sales in this category have stalled. The category grew at a sluggish 2 percent rate in the first quarter and by 1 percent in the second quarter. Jeetil Patel, a Deutsche Banc Alex Brown analyst, predicts the third-quarter figure will be a decline of 7 percent.

And that is not what investors want to see. For investors to throw their support behind a technology company, it must either record significant growth or generate profits.

At this point, it is unclear whether Amazon can do either.

 

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