February 2, 2000 5:15 PM PST

Amazon reports wider loss, but book business profits

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Amazon.com posted a wider-than-expected loss for the latest quarter but said its U.S. book business turned a profit.

The Internet retailer posted a pro forma net loss of $185 million, or 55 cents per share, in the fourth quarter, compared with a loss of $22 million, or 7 cents, for the like quarter a year ago. Analysts had expected Amazon to post a loss of closer to 48 cents per share.

Amazon's net sales for the fourth quarter totaled $676 million, up from $253 million for the like quarter a year earlier.

Customer accounts increased by 3.8 million during the fourth quarter to more than 16.9 million. Repeat customer orders represented more than 73 percent of its orders.

At 1 p.m. PST, the close of regular market trading, Amazon shares were up $2 to $69.44. The earnings report was issued after the close of regular trading. In after-hours trading, Amazon shares jumped to about $78.

"Our U.S. book business was profitable in the fourth quarter, and we expect it will be profitable in 2000," said Amazon chief financial officer Warren Jenson. "We expect strong year-over-year sales growth in the first quarter, and our outlook for growth in 2000 remains strong."

Jenson added: "We expect overall gross margin will approach 20 percent in the first quarter of 2000 and we expect further improvement in gross margin during 2000.

"We expect that in 2000, our overall operating loss will decrease significantly as a percentage of sales."

Amazon expects first-quarter sales to be up compared with the same period a year ago, company officials said. But the giant expects sales to be down from its fourth-quarter revenues, because of the seasonal nature of Amazon's toys and consumer electronics businesses.

Should that happen, it would mark the first time Amazon's sales have slumped on a sequential basis.

Amazon's U.S. book business generated $317 million in revenue for the fourth quarter, up more than 66 percent from the previous year. But the retailer did not state a figure for the bottom line, nor did it explain how the business became profitable.

Jeff Bezos Analysts had been closely watching to see whether Amazon could turn a profit in its U.S. book business, as promised last year.

"Earnings were terrible," said Dan Mathisson, head stock trader at D.E. Shaw Securities in New York. "But they came out with a positive view of the future. And with Internet stocks, people are looking for the outlook."

Amazon said its order fulfillment expenses were 16 percent of sales, up from 10 percent in the fourth quarter of the previous year.

Amazon's profit margins during the fourth quarter shrank to 13 percent from 21.1 percent during the same period in 1998 and from 19.8 percent during the third quarter of last year. In a conference call with investors and analysts, Jenson attributed the falloff in the company's margins on a $39 million "inventory-related" charge during the quarter. Without those charges Amazon's gross margin would have been 18.8 percent.

"We've had some inventory issues," Amazon chief executive Jeff Bezos said during the call. "We're always going to err on the side of the customer. That's part of our business model."

Some of Amazon's newer business operated at a negative margin for the quarter, Jenson said, meaning that Amazon sold products in those categories for less than cost. In the second half of last year, Amazon launched its toys, consumer electronics, home improvement and software stores, but Jenson declined to say which stores had negative profit margins.

Amazon's losses for U.S. sales reached 20 percent, he said, but the company expects that number to decline to a single digit percentage by the fourth quarter he said.

"We expect to reap the benefits of scale," Jenson said. "We expect that the fourth quarter will represent the high point for the overall level of operating loss in both dollar terms and as a percentage of sales."

One area where Amazon has shown marked improvement is in its auctions, which launched last year. During the conference call, company president Joe Galli said the combined number of registered users for Amazon's auctions, zShops and Sotheby's auctions surpassed 1 million, and the total number of items listed on those sites reached 1.5 million.

Similarly, Yahoo's auction site offers more than 1 million items. But auction leader eBay lists nearly 4 million items on its site.

Amazon launched a flurry of new stores last year, and expanded its distribution network to handle all of its new products. Despite the company's consecutive losses, company officials said that Amazon will continue to expand in 2000.

"We continue to believe we are in a land-rush period in this industry," Bezos said. "We feel we are the most efficient e-commerce incubator in the world."

In recent days, the company has said that it will add health and beauty products and home furnishings to its site through deals with Drugstore.com and Living.com, respectively. Amazon said it will not add any more distribution centers in the United States in 2000; however, it has plans to continue expansion overseas.

Bloomberg contributed to this report.

 

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