Amazon's Quarterly Earnings Fall 43%

Like a number of online retailers, offered free-shipping incentives during the holiday shopping season.
Like a number of online retailers, offered free-shipping incentives during the holiday shopping season. (By Ken James -- Bloomberg News)
By Ylan Q. Mui
Washington Post Staff Writer
Friday, February 3, 2006

Online retailing giant said yesterday that its fourth-quarter profit fell 43 percent, despite record sales during a holiday season when Internet shopping boomed.

The company attributed its lower earnings to free-shipping incentives and continued investment in technology, such as the division devoted to developing online search tools. But analysts also cited increasingly stiff competition from other online retailers, such as eBay Inc. as well as big discounters such as Wal-Mart Stores Inc.

Fourth-quarter earnings were $199 million (47 cents a share), compared with $347 million (82 cents) in the corresponding period in 2004. However, total sales grew 17 percent, to $2.98 billion from $2.54 billion.

"It was definitely a year where we increased our cost structure significantly. We did that very deliberately," Amazon founder and chief executive Jeffrey P. Bezos told investors yesterday during a conference call. He added that the company expects to see returns on investment in technology in a couple of years.

The retailer said last month that it had sold a record 108 million products during the holiday season, with a strong showing in electronics such as the iPod music player. But to compete with other online retailers, it offered customers free two-day shipping for a limited time and unlimited free shipping for members of Amazon Prime, which debuted in February and comes with a $79 annual fee.

Company officials yesterday defended the program, saying its members bought more items across more categories than non-members. But analysts were concerned that the high cost ate into profit.

"As shipping costs rise, the Amazon Prime promotion becomes an increasingly expensive weapon," wrote analyst Jordan Rohan of investment firm RBC Capital Markets in a recent report, which rated the stock as underperforming. It concluded that "there are better investments elsewhere."

Several analysts questioned the price of Amazon's stock, which closed yesterday at $42.74, down $1.24, or 2.82 percent. The company released its results after the market closed, and the price dropped even further in after-hours trading, reaching $39.22 after 6 p.m.

In a report released yesterday, analyst Paul Keung of CIBC World Markets said the stock would be more attractive under $40 per share. Rohan estimated that stock price could drop by 25 percent. Robert Peck of Bear, Stearns Securities Corp. was more positive, citing 18 percent growth in traffic during the fourth quarter. Still, he conceded that "we remain bullish longer term but point out near-term volatility."

Competition has increased among online retailers as more people become comfortable with Internet shopping. Non-travel spending increased 25 percent during the holiday season over the previous year to $19.6 billion, according to ComScore Networks Inc., a research firm. Yearly spending grew 24 percent, to $82.3 billion.

Amazon was the second most-visited online retailer in December, just after eBay, ComScore said. But Wal-Mart and Target Corp., third and fourth, respectively, gained significant ground. ComScore Chairman Gian Fulgoni said he sees the landscape becoming only more aggressive.

"Amazon is finding itself in a situation where its competition is by no means just eBay," he said. "It's all of the traditional bricks-and-mortar folks."

Amazon also reported results for fiscal 2005 yesterday. Total sales grew 23 percent, to $8.49 billion from $6.92 billion, in 2004. But yearly earnings also fell, hitting $359 million (84 cents), compared with $588 million ($1.39), a decline of about 39 percent.

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