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Amazon's Profit Forecast Falls Short of Estimates

Amazon.com Inc., the largest online retailer, forecast fourth-quarter operating income that fell short of analysts’ estimates, squeezed by spending on new warehouses and marketing for Zappos.com and the Kindle e-reader.

Operating income will be $360 million to $560 million, Seattle-based Amazon said today in a statement. Sales will be $12 billion to $13.3 billion. Analysts surveyed by Bloomberg had forecast operating profit of $621.6 million and sales of $12.2 billion on average.

Chief Executive Officer Jeff Bezos is increasing spending on warehouses to handle a growing array of televisions, apparel and auto parts. The company also stepped up its use of TV commercials to promote the Kindle and introduced a less expensive version of the device, eating into profitability. Operating expenses rose 40 percent to $7.29 billion last quarter.

“Amazon’s operating income forecast for the fourth quarter looks below the consensus even at the highest end of the guidance range,” said Fred Moran, an analyst with Benchmark Co. in Boca Raton, Florida. “It shows the margin pressure the company has been experiencing.”

Amazon fell 3.7 percent in late trading after the announcement. The shares, up 23 percent this year, closed at $164.97 earlier on the Nasdaq Stock Market.

Third Quarter

Third-quarter net income rose 16 percent to $231 million, or 51 cents a share, from $199 million, or 45 cents, a year ago. Sales climbed 39 percent to $7.56 billion, Amazon said. Analysts projected profit of 48 cents and sales of $7.37 billion.

Amazon introduced a thinner version of the Kindle in July that works with Wi-Fi and is $50 cheaper than the $189 Kindle that runs over mobile-phone networks.

Amazon is expanding its warehouses and distribution centers to take advantage of the economic and retail recovery. It’s also spending more to market Zappos.com, an online shoe retailer it acquired last year. The company has built 10 new warehouses and will finish another three by the end of the year, Chief Financial Officer Tom Szkutak said on a conference call.

“That -- combined with perhaps some other factors like promotional activity and lower Kindle prices -- has perhaps temporarily hindered margins,” Moran said. “The company is currently in a reinvestment spending mode that will hinder profitability in the short term to help sustain the substantial revenue growth of the company.”

Kindle Sales

The Kindle will generate $2.8 billion in revenue this year for Amazon and $5.3 billion in 2012, according to estimates by Caris & Co. Amazon doesn’t disclose Kindle sales. The company’s ambitions for the Kindle may go beyond books, said Sandeep Aggarwal, a Caris analyst in San Francisco.

“Kindle device users will not only continue buying more e- books but also subscriptions, accessories, hardware warranties, and eventually use Kindle’s wireless and computing capabilities for other data and content,” such as music and videos, he said in a note to investors.

Amazon got its start in 1995 as an online bookseller. It has since expanded into dozens of categories -- from baby products to DVDs. Amazon Web Services, which lets customers rent servers to house data and run computer networks, may one day be larger than the retail business, the company has said.

“They’re growing at a good three times e-commerce, and that’s what’s causing them to look at continually investing in the business,” said Scot Wingo, CEO of ChannelAdvisor Corp., which helps merchants sell online. “That erodes the short-term market picture, but sets them up for growing well into the future.”

EBay reported profit and sales forecasts yesterday that exceeded analysts’ projections, helped by the growth of its PayPal payment processing unit and a revamped marketplace site.

To contact the reporter on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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