Black Ink Spells Rally at Amazon - TheStreet

Black Ink Spells Rally at Amazon

A fourth-quarter profit ignites the online retailer's shares.
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Updated from 7:24 a.m. EST

Amazon.com

(AMZN) - Get Report

kept a much-watched promise Tuesday while breaking with a few long-standing traditions. Its stock reaped the benefits.

The online bookseller put a halt to its time-honored rite of losing money, posting a fourth-quarter profit on both the expense-light pro forma basis and the more conservative generally accepted accounting principles, or GAAP, basis. Fourth-quarter sales surged to $1.12 billion, well above Wall Street's target.

In another break with tradition, Amazon reported its numbers before the start of trading Tuesday -- at 3:46 a.m. Seattle time, to be exact. That proved to be a smart move: The profit, a long-awaited achievement that the company began promising more than a year ago, pushed Amazon stock up 21% to $12.39 on 40 million shares traded.

Amazon performed "better than many of us thought they could," says Eric Von der Porten, of money management firm Leeward Investments. He owns both put and call options on Amazon stock but is net short. "I'm glad I stayed hedged."

Lower Still

Cost-cutting played a big role in the strong quarter. "We saw significant improvements in operational efficiency, which allowed us to cut prices on books because we could afford to do so," Jeff Bezos, Amazon's CEO, said on a postearnings conference call.

Shipping costs fell to 9.8% of sales, down considerably from 13.4% in the year-ago period. The company operated two fewer distribution centers than in last year's fourth quarter. Marketing expenses fell 38% from a year ago to $34.5 million.

"They clobbered it," says Shawne Milne, an analyst at Soundview Technology Group, who had been expecting so-called fulfillment costs of around 12%. (Milne has a hold rating on the stock, and his firm doesn't have a banking relationship with the company.)

In the conference call the company stressed that it would continue lowering prices for books -- to levels that would be "ridiculous" in the physical world, said Warren Jenson, Amazon's chief financial officer -- and announced a permanent offer of free shipping for all orders over $99. In the past, deals for free shipping and the like have triggered concerns with investors about Amazon's cash use, but Tuesday Wall Street was putting those worries aside.

Amazon also offered bullish financial guidance for coming periods, saying it doesn't expect to remain profitable in subsequent quarters but that it believes sales will exceed Wall Street's estimates. First-quarter sales should rise to between $775 million and $825 million, compared with a consensus estimate of $747 million. For the full year, sales are expected to grow at least 10%. This would put sales at about $3.43 billion, slightly ahead of Wall Street's estimate of $3.36 billion.

For the full year, Amazon expects to post an operating profit of $30 million or more, and could possibly achieve positive free cash flow, which includes capital expenditures, the company said in its statement.

Amazon's cash position -- a lightning rod over the last year for Amazon's many critics, who claim the company's core business isn't strong enough to sustain it -- was also better than expected. Amazon had about $1 billion in cash and marketable securities on hand at the end of the quarter, compared with projections of around $900 million.

Stickiness

Amazon, based in Seattle, earned $59 million on a pro forma operating basis in its fourth quarter, reversing the year-ago loss of $60 million. On a pro forma net basis, which includes interest expense and is the earnings figure that Wall Street watches, the company earned $35 million, or 9 cents a share, compared with a loss of $90 million, or 25 cents a share, in last year's fourth quarter. On average, analysts expected the company to lose 7 cents a share, according to Thomson Financial/First Call.

Amazon also reported a net profit of $5 million, or a penny a share, using GAAP. A footnote in Amazon's press released says the latest quarter would have shown a loss but for gains on currency hedging.

Shares in Amazon had risen steadily during the holiday season, even as most on Wall Street were

skeptical the company could exceed its profit goals.

Still, "Valuation remains a sticky subject with this company," says Milne, the analyst at SoundView, noting that the company continues to lose money on an ongoing basis and that on a price-to-sales basis the stock trades at a substantial premium to other retailers. On Tuesday, though, Amazon was looking sticky-sweet.