Analysts Look to Amazon's Holiday Sales Numbers With a Wary Eye

What's good for online retail is good for Amazon.com. This simple and seemingly widespread belief helps explain why shares in the Seattle-based bellwether are up over 70% since November.

But Wall Street analysts aren't buying it. None raised earnings or sales estimates for the company in December, according to the ILX database, and at least two brokerages -- McAdams Wright Ragen and Wells Fargo Securities -- have downgraded the stock because of the jump in share price.

After years of giving the money-losing company the benefit of the doubt, some analysts have grown super-skeptical about Amazon. And there's plenty to fuel their doubts.

On the one hand, a slew of data and press reports have suggested online retailers had a bang-up holiday season, and investors have reacted by bidding up Amazon shares. Overall online spending increased 10% in November and an estimated 15% to 25% in December, according to research firm Nielsen/NetRatings.

That doesn't look bad when you consider that sales at bricks-and-mortar retailers are expected to have edged up just 2.2% for the fourth quarter, according to estimates published by the National Retail Federation.

Yet the online growth rate was much lower than Nielsen/NetRatings' projection of a 43% rise in November and December, according to Sean Kaldor, an analyst at the research firm.

Online holiday sales were "definitely not that great," says Scott Reamer, who covers Amazon for S.G. Cowen. "To me, it's a real head fake. Other retail stocks move on macroeconomic retail trends because they are already profitable." (Reamer has a neutral rating on the stock, and his firm does not have a banking relationship with Amazon.)

A Rough Path to Profitability

Even if overall online growth was good for Amazon's top line, that may be small consolation for a company trying to eke out its first profit.

"It is no longer about revenue growth," Reamer says. "The hard work is not necessarily in the top line, it is what's below it."

The company is expected to report its fourth-quarter earnings on Jan. 22, and most on Wall Street expect revenue growth of zero to 10%. That would equate to about $1 billion in sales, according to analysts surveyed by Thomson Financial/First Call. Amazon ratcheted down guidance when it reported third-quarter results in October. And Wednesday, the company said in an email distributed to Wall Street analysts that it will not preannounce results.

A year ago, Amazon said it would break even on a limited, operating basis, for the first time in the fourth quarter of 2001. But when Amazon talks profits it means EBITDA, or earnings before interest, taxes, depreciation and amortization, a standard measure of cash flow on Wall Street. The company will still lose money using generally accepted accounting principles, or GAAP, for the foreseeable future.

Comparison Shopping

Analysts are also questioning whether the strong holiday sales reported by other online retailers graced Amazon as well. AOL, for one, recently announced that shopping by its members jumped 72% in the fourth quarter. Yet much of that growth came from women's and teen's clothing, categories that Amazon does not currently handle, even through its partnerships with other retailers.

Yahoo(YHOO) and MSN also reported strong growth in online retail sales this holiday season, but those rises were coming off much smaller sales bases than Amazon's.

Amazon is doing little to unravel one of the biggest mysteries of the just-completed holiday retail season.

Unlike bricks-and-mortar retailers, Amazon doesn't release monthly sales data. The upshot is that investors have little information on which to gauge the company's performance this holiday season. Instead, Amazon releases its so-called Delight-O-Meter, a running tab of items sold during the holidays. By this measure, the company said items sold in the holiday season -- between Nov. 9 and Dec. 21 -- rose to 38 million, compared with 31 million in the year-ago period. However, this year the company included goods sold via its partnerships with other retailers such as Toys R Us(TOY) and Circuit City(CC), items that were excluded from last year's figure.

Kristine Koerber, an analyst at WR Hambrecht, says it's "not a true apples-apples comparison, and not enough to get us excited about the stock." (She has a neutral rating on the stock, and her firm has had a banking relationship with Amazon.)

Still, a larger share of Amazon's sales coming from its partnerships will help the profit outlook because the margins are better. In the third quarter, for example, gross margins from its so-called services segment, which includes all its partnerships, were 59%, compared with 27% in its U.S. books, music and video business, its largest segment.

Despite analysts' lingering skepticism, concerns that Amazon will fall short of sales projections in the fourth quarter have abated. In late November, figures provided by comScore, a research company that tracks sales at Amazon and sells its projections to Wall Street clients, raised the prospect of a slight shortfall. However, Amazon was helped by a holiday shopping season that extended to Dec. 21; in past years consumers had to shop earlier to get goods in time for Christmas.

"If so, the questions then become, what do margins look like, how effective were the company's cost controls, and what is the outlook for 2002?" says Eric Von der Porten, a money manager at Leeward Investments, who owns put options on Amazon, essentially a bet the stock price will fall.

>To order reprints of this article, click here: Reprints