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Amazon’s revenues were good, but margins are a disaster

By February 3, 2005No Comments

Amazon’s profits fail to impress

Shares in Amazon fell 13% in after-hours trading on Wednesday after the online retailer’s latest profits fell below market expectations.

Although posting a 250% rise in net fourth quarter profits, up to $346.7m (£184m) on a year earlier, this was boosted by a large one-off tax break.

Stripping out the $244m tax benefit, Amazon’s profit per share fell from 82 cents down to 24 cents.

Wall Street analysts were expecting the company to post a 40-cent figure.

Total revenues for the three months to 31 December were $2.54bn, up 30% from the $1.95bn for the same period last year, benefiting from record sales during the festive period.

Amazon shares fell to $36.34 in after-hours trading from their Nasdaq close of $41.88.

Martin Pyykkonen, an analyst at Janco Partners, said Amazon’s worsening profit margins “stuck out like a sore thumb”.

“They’re selling more stuff and making less profit margin on it,” he said.

Fellow analyst Chris Baggini, manager of the Gartmore Growth Fund, was even more critical.

“Margins are well below expectations – revenues were good, but margins are a disaster.”

Mr Baggini blamed the drop in profits on tough price competition from other online retailers.

In an effort to attract more customers, Amazon also announced on Wednesday that it would begin offering its US customers the option of paying a flat annual fee of $79 for unlimited free two-day delivery on orders.
In a letter to customers posted on the retailer’s US website, Amazon chief executive Jeff Bezos said he expected the new program to be expensive for Amazon in the short-term but hoped it would build greater long-term loyalty.

Yet Mr Pyykkonen said the offer would only further hit Amazon’s profits.

“It’s great for the consumer, not for great for margins,” he said.

For 2004 as a whole Amazon reported profits of $588.5m on revenues of $6.92bn. That compares with 2003 earnings of $35m on revenues of $5.26bn.

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