October 23, 2001 6:05 PM PDT

Amazon reaffirms pledge for profitability

Amazon.com on Thursday reaffirmed its pledge to be profitable in the fourth quarter, as it posted a third-quarter loss that met Wall Street expectations.

"While we can offer no guarantees, we're committed to reaching our objective of reaching pro forma profitability in the fourth quarter," said Amazon Chief Executive Jeff Bezos.

The Seattle-based e-tailer cut its losses by 30 percent in the third quarter, reporting a net loss of $170 million, or 46 cents per share. In the same period last year, Amazon saw a net loss of $241 million, or 68 cents per share. Amazon posted a slight increase in net revenue with $639 million, up from $638 million in the year-ago period.

Excluding amortization of good will, stock-based compensation and other noncash expenses, Amazon posted a pro forma net loss of $58 million, or 16 cents per share, compared with $89 million, or 25 cents per share, in the same period last year.

The company was expected to post a pro forma loss of 16 cents per share on revenue of $650 million, according to First Call.

Analysts were eager to study Amazon's third-quarter results for signs that the company would miss its profit goals for the fourth quarter. Multitudes of businesses have cited the Sept. 11 terrorist attacks in the United States as the cause for revenue shortfalls, and Amazon watchers wondered whether the e-tailer would be next.

Failing to meet its profitability goal in the fourth quarter would be a dramatic blow for Amazon, as investors have waited a full six years for profits, on a pro forma basis to boot. Their patience has run out, analysts have said.

"Reaching profitability doesn't require heroics," said Warren Jenson, Amazon's chief financial officer. "While the history of (the fourth quarter) has yet to be written, we are in great shape."

Amazon lowered projections for the fourth quarter, however, saying that net sales would be flat or would increase by 10 percent from the year-ago period. Earlier in the year, Amazon projected sales would rise 10 percent to 20 percent.

The company said highlights from its quarter included skyrocketing sales in its used-products category. Bezos said used goods at Amazon made up 17 percent of all U.S. sales. The company also cut its pro forma loss from operations to $27 million, or 4 percent of net sales, compared with $68 million, or 11 percent, from the same period a year ago.

The downside for Amazon was that sales fell for the third consecutive quarter. Sales were $700 million in the first quarter, $667 million in the second and $639 million in the third.

More bad news for investors was that Amazon's profit margins--the money left over after costs are deducted--dipped from 26 percent to 25 percent. Amazon's core product category of books, music and videos, though remaining profitable, fell 12 percent, the company said. Jeetil Patel, a Deutsche Banc Alex Brown analyst, predicted the decline would be closer to 7 percent.

Patel said the drop in gross margins was probably due to Amazon's recent aggressive discounting.

"We lowered prices over 20 to 30 percent off of list prices," Bezos said. "We could afford to do this by reaching double-digit gross margin in this segment."

It remains to be seen how the terrorist attacks will affect Amazon's business during the holidays. Some industry observers theorized that fears over anthrax and more terrorist acts might prompt consumers to steer clear of brick-and-mortar malls to do their shopping.

Amazon said its estimates are "appropriately conservative." Jenson said that as of now, the company is ahead of last year in terms of growth rates.

 

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