Volume Push Has Amazon 'Humming'

Price cuts underlie stronger-than-expected sales and improving forecasts.

Author:: Tim Arango
Publish date:: Apr 23, 2002 6:13 PM EDT

Updated from 4:24 p.m. EDT

Amazon.com

shares rallied after the company extended its financial hot streak Tuesday, posting better-than-expected first-quarter results and boosting 2002 guidance.

Seattle-based Amazon reported a first-quarter loss of 6 cents a share, compared with a 21-cent loss in the year-ago period. Revenue was $847 million, up 21% from $700 million in last year's first quarter. On average, analysts expected Amazon to report a 9-cent loss on sales of $805 million.

After dropping a quarter during Tuesday's regular session, Amazon jumped $1.06 in postclose trading to $15.12 as execs answered Wall Street's questions about the company's high-volume strategy. Amazon shares are far from their boom-era highs, but they have mostly held their ground since the stock's rally following the company's fourth-quarter profit report in January.

Shady Place

Perhaps most notable of all was that the company's latest-period pro forma loss narrowed to a penny a share, a much thinner loss than analysts were expecting. "That's gigantic," says Jeetil Patel, who follows the company for Deutsche Bank Securities, "especially in what is supposed to be one of the slowest quarters of the year. Their business is humming." (He has a buy rating on the stock, and his firm hasn't done recent underwriting for the company.)

This time around, investors and analysts will be particularly pleased with the performance of the company's core U.S. books, music and video business, Amazon's largest segment. In the quarter, sales grew 8% from last year's first quarter to $443 million. Business had contracted last fall, and there were some

lingering worries following the fourth quarter. The company's used business, known as Amazon Marketplace, also grew substantially. In the quarter, 23% of total U.S. orders were from Marketplace, up from 4% a year ago.

Several bits of data released from various research outfits show that e-commerce was strong in the first quarter, and many analysts had ratcheted up sales estimates in recent weeks. However, the company instituted free shipping for orders over $99 during the quarter, and so most people kept their profit targets the same.

Evidently, though, the company is feeling the effects of volume growth. Amazon said sales for the second quarter will come in between $765 million and $815 million. Wall Street had expected sales of $750 million. For the full year, sales will grow at least 15%, Amazon said. This would mean sales will be at least $3.6 billion, compared with the current consensus estimate of $3.5 billion. The company also cut book prices in a move aimed at further boosting sales.

Amazon also forecast second-quarter pro forma income of $5 million to $15 million, while most analysts had been forecasting a loss. Including all costs, of course, that will mean a GAAP loss for the period.

Cashing In

That said, Amazon took another step to putting those pesky balance sheet questions to rest. The company said it had $745 million in cash and marketable securities on hand at the end of the quarter, a big step up from its prior guidance of about $600 million. As recently as late last year some investors were betting that the company would run out of cash, but those concerns have largely slipped aside as Amazon's financial health has perked up far more than even most bulls expected.

Given the company's ruddy good health and the early success of the volume strategy, Amazon made moves Tuesday to double its bet. The company slashed prices by 30% for most books over $15, on top of this spring's free shipping offer and last July's price cut for books over $20. "This is a big deal, and can be expensive in the short term," said CEO Jeff Bezos in a conference call. "We make such price-cutting possible by focusing on productivity."

The price cuts aren't being limited to books. On the call, Bezos said the company is focusing on "sharpening pricing" on other products, including shipping fees. Amazon had once been criticized for its strategy of growing sales while neglecting the cost side, and what effect price cuts could have on gross margins came up several times on the conference call. The company's margins are already a source of some concern, seeing as Amazon brought in $847 million of revenue in the latest period but still posted a profit only on an operating basis.

But the company's efforts at trimming excess costs -- which included layoffs and the closing of a distribution center last year -- have allowed it to cut prices and still boost the bottom line, executives emphasized on the call.

"Driving unit volume does reduce costs," Bezos said. "This isn't a short-term strategy."