Amazon Swings to Profit as Sales Rise

Online retailer Amazon.com Inc. on Tuesday posted its first profitable quarter outside of the Christmas holidays, driven by free-shipping offers and growth in higher-margin sales from partners such as Target Corp. and Toys R Us Inc.

The Seattle-based merchant recorded $16 million in net income, or 4 cents a share, in its third quarter, compared with a $35-million loss, or 9 cents, a year earlier. Sales grew 33% to $1.13 billion in the quarter that ended Sept. 30, compared with $851 million a year ago.

Despite the jump in revenue, investors cooled on the company’s stock, which has more than tripled in the last 12 months. Shares dropped 24 cents to $59.35 on Nasdaq, but fell to as low as $57.85 in after-hours trading after the earnings announcement.

Although Amazon beat Wall Street’s official per-share earnings expectations by a penny, investors banked on unofficial “whisper” numbers that were higher, analysts said.

“Over the last few quarters, Amazon beat expectations by 4 to 6 cents,” said Dan Geiman, an analyst with McAdams Wright Ragen Inc., a Seattle brokerage. “This time, it was by a penny, and the sales were exactly in line. People just had far higher expectations for the company.”

In addition, investors were unmoved by the company’s 2004 projections. Amazon said it expected sales in the fourth quarter, which includes Christmas, to be $1.76 billion to $1.91 billion, bringing 2003 sales to $5.08 billion to $5.23 billion. It also estimated 2004 sales at $5.75 billion to $6.25 billion.

“The revenue growth in this quarter was 33%, and they’re guiding for 13% to 20%,” said Sandy Sanders, an analyst with Boston-based Evergreen Investments, whose funds own 1.8 million shares of Amazon. “We think that’s deliberately conservative. We believe the figure is likely to be 20% or more for the next couple of years.”

Indeed, Amazon Chief Executive Jeff Bezos issued a bullish statement on the upcoming quarter. “We expect more customers to turn to us for their holiday gifting needs this year, producing our biggest holiday shopping season ever,” he said.

Part of the company’s growth comes from sales from hundreds of outside retailers such as Target and Toys R Us that pay Amazon to manage their online commerce. Such sales, which grew to 22% of Amazon’s total unit sales in the third quarter from 17% a year ago, generate higher margins for Amazon because they don’t carry inventory risks.

But as that business grows, analysts complain, Amazon is not releasing crucial information about the nature of its third-party revenue. In particular, the company discloses third-party sales only in terms of unit volume, but it doesn’t break out how those sales contribute to overall revenue.

“As Amazon grows, it hasn’t disclosed where their revenue comes from,” said Safa Rashtchy, an analyst with Piper Jaffray & Co. in New York. “The margins for toys, for example, is going to be different than for Armani shoes. They need to disclose that.”