Devil's in the Details on Amazon Earnings Report

Details, details, details.

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Forget Being the Earth's Superstore. Can Amazon.com Turn a Profit?

That is what analysts and investors hope to see when Amazon.com (AMZN) reports its quarterly results after the close of trading Tuesday. The beleaguered Internet merchant offered investors a Cliff Notes version of its quarter when it preannounced on April 9. While shares shot up 32% that day after Amazon said strong sales of consumer electronics would lead to a narrower-than-expected loss, most analysts were left salivating for more information.

The company expects revenue to exceed $695 million in the quarter -- about 4% above the consensus estimate of $669.6 million, according to Thomson Financial/First Call. At the same time, the company said it expects to lose 22 cents a share, much less than the 30-cent loss expected by Wall Street.

The company attributed much of the improvement to a surge in consumer electronics sales, while growth in its core books business was only "slight." This left many analysts scratching their heads, as consumer electronics sales typically carry lower margins. The company said its gross margins would hit about 25% for the quarter, up from the expectations of margins in the low 20% range.

Family Tree

"That's a big difference," says Holly Gustafson, an analyst at Legg Mason Wood Walker. "I'd like to know where that's coming from and how they did it." (Gustafson has a buy on Amazon, and her firm doesn't have a banking relationship with the company.)

It's Back Amazon rallying recently

Because of the preannouncement, some expect Amazon to revise upward its guidance for 2001. "We believe shares could move higher on a positive revised outlook," wrote W.R. Hambrecht analyst Kristine Koerber in a note published Monday. However, Koerber isn't budging from her neutral rating on the stock, due to concerns over the company's long-term chances for profitability and the health of its balance sheet. (Her firm doesn't have a banking relationship with Amazon.)

Amazon has said it will become profitable on a limited basis by the fourth quarter of 2001. Expect CEO Jeff Bezos to emphasize this both in the press release and the conference call Tuesday, say analysts. "He will underscore and reiterate that," says Gustafson.

Despite the rosy preannouncement and a recent joint venture with bookstore chain Borders (BGP), which have driven a strong run in Amazon shares in recent weeks, the crucial issue for the company remains whether it will have enough cash to pay its bills at it drives toward profitability. The company says it will have plenty of cash and marketable securities -- about $640 million worth at the end of the first quarter -- but some analysts say the company could face a creditor squeeze in the second half of the year.

And questions over how the company reports its finances persists. Gary Lutin, a New York investment banker who has organized a series of forums on Amazon hosted by the New York Society of Securities Analysts, will hold two more public meetings, on April 26 and May 10, prior to the company's annual meeting.

Shares recently traded up 60 cents at $16.38.

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