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Amazon Falls on Operating Profit Forecast Miss

Amazon Beats Estimates as Digital Content Starts Paying Off
An employee tapes up a box for shipment at the Inc. distribution center in Phoenix, Arizona. Photographer: David Paul Morris/Bloomberg Inc., the world’s largest online retailer, decreased the most in more than a year after forecasting operating profit that missed estimates as the company invests in warehouses and digital content.

Shares fell 7.2 percent to $254.81 at the close in New York, the biggest decline since February 2012. Amazon predicted an operating loss of $340 million to a profit of $10 million, compared with analysts’ projections for a profit of $165.1 million. Net income in the first quarter dropped 37 percent to $82 million, or 18 cents a share, from $130 million, or 28 cents, a year prior.

Chief Executive Officer Jeff Bezos is pouring money into new warehouses and digital content to lure new customers and outside sellers who can generate extra income. Even as spending climbed, growth in the number of items sold slowed.

“Investors are disappointed with the customer growth and the unit growth,” Jason Helfstein, an analyst at Oppenheimer & Co., said in a telephone interview. “Both those metrics continue to slow.”

Unit growth, an indicator of the strength of retail sales, decelerated to 30 percent in the first quarter from 49 percent in the same period a year earlier, Amazon said. The slowdown suggests that bricks-and-mortar stores -- and their online outposts -- are stanching share losses to Amazon, according to Doug Anmuth, an analyst at JPMorgan Chase & Co.

‘Traditional Retailers’

“Traditional retailers are losing less relative share as they increase selection online, price match more aggressively, and work to combat showrooming,” Anmuth wrote in a research report today. Showrooming refers to customers who browse in stores to inspect items before buying them online.

Even as unit growth slows, Amazon is making progress in trimming distribution costs. Bezos added 20 shipment hubs last year to attract customers by offering faster delivery times with a massive selection of products that eclipses what retail stores can offer. The initiative is also designed to attract new merchants willing to sell their wares through Amazon’s storefront and use the e-commerce company to complete orders.

Products sold by third parties made up 40 percent of total sales, Chief Financial Officer Thomas Szkutak said on a conference call. Digital-content sales are increasing at a “much faster” pace than physical products, Szkutak said. The 10 best-selling items on the website in the first quarter were digital products or sales related to Kindle tablets and electronic-book readers, he said.

Shipping Costs

Shipping costs as a percentage of net sales decreased, indicating warehouses that are closer to delivery destinations may be tempering expenses. Those expenses were 4.7 percent of revenue in the first quarter, compared with 5.1 percent last year.

As those expenses fall, margins are improving. Gross margin was 26.6 percent in the first quarter, compared with 24 percent in the same period a year earlier, data compiled by Bloomberg show.

First-quarter operating income was $181 million, the Seattle-based company said in a statement yesterday. Analysts on average had projected $96.8 million, according to data compiled by Bloomberg. Sales rose 22 percent to $16.1 billion, in line with analysts’ predictions.

‘Margin Story’

“The improving margin story appears uninterrupted from what we saw in the fourth quarter,” Daniel Kurnos, an analyst at New York-based Benchmark Co., said in an interview.

Second-quarter revenue will be $14.5 billion to $16.2 billion, Amazon said. Analysts are projecting sales to rise 24 percent $15.9 billion.

Investors have rewarded Bezos’s investment strategy with one of the highest valuations among the company’s peers. Amazon is trading at 81 times projected 2013 earnings, compared with a price-to-earnings ratio of 19 for EBay Inc. and 25 for Japanese online-retailer Rakuten Inc., according to data compiled by Bloomberg.

Operating margin in North America widened to 4.9 percent from 4.7 percent the year prior. Investors use that number to predict the trajectory of Amazon’s overall profit, because it excludes a negative impact from lower-margin emerging markets.

Gross-Margin Expansion

Amazon announced digital-content agreements with A&E Television Networks LLC, CBS Corp. and Public Broadcasting Service in the first quarter, bringing shows such as “Downton Abbey” and “Justified” to its video customers. The online retailer is also planning to release a television set-top box that would stream video over the Internet into consumers’ homes, people familiar with the matter have said.

Third-party sales and online services will continue to boost profit, since “once those things become drivers of gross margin expansion, they hold,” said Mark Mahaney, an analyst at RBC Capital Markets in San Francisco who rates the stock outperform.

Szkutak also highlighted potential for growth in Amazon’s advertising business, which made up less than 4 percent of revenue in 2012.

LivingSocial Inc., a daily-coupons site, received additional funding of $56 million from Amazon in the first quarter, according to a filing today. While LivingSocial’s revenue rose 23 percent to $135 million and operating expenses declined, the company posted a first-quarter net loss of $50 million versus a $156 million profit a year earlier. Amazon said it values LivingSocial at $36 million on its books.

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