Amazon’s Sales Forecast for Holidays Misses Estimates

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Jeff Bezos
Jeff Bezos, chief executive officer of Amazon.com Inc., unveils the Fire Phone in Seattle on June 18, 2014. Photographer: Mike Kane/Bloomberg

Amazon.com Inc. forecast sales and profit for the holiday quarter that missed analysts’ projections, underlining the limits to Chief Executive Officer Jeff Bezos’s strategy of spending big to fuel growth.

Revenue for the fourth quarter is anticipated to be $27.3 billion to $30.3 billion, the Seattle-based company said in a statement today, while profit excluding some items will range from a loss of $570 million to a gain of $430 million. Analysts on average projected sales of $30.9 billion and profit of $460.5 million, according to data compiled by Bloomberg.

The forecast was punctuated by third-quarter sales and profit that also missed analysts’ estimates. The results included a $170 million inventory charge for the Fire smartphone, which highlighted a lack of demand for the handset compared with supply. International sales were also hampered by a new online sales tax in Japan.

Driving the holiday-quarter projection was currency exchange rates associated with the strong U.S. dollar, as well as stock-based compensation costs as Amazon continues to ramp up hiring, said Chief Financial Officer Thomas Szkutak. The forecast included about $470 million in stock-based compensation as Amazon increased its workforce to 149,500 at the end of September, up 36 percent from 109,800 a year earlier.

No Profit

The results stoked investor concerns that sales growth will no longer make up for Amazon’s lack of profit. Net income has been elusive as Bezos spends on products such as Fire phone and distribution centers, as well as drones and original programming. Investors have punished Amazon for its losses, with shares down more than 20 percent this year. That helped Chinese company Alibaba Group Holding Ltd. become the world’s largest e-commerce provider by market capitalization upon its initial public offering last month.

“It’s a little ho-hum as we get into Christmas,” said Kerry Rice, an analyst at Needham & Co. “I don’t think this is by any stretch a disaster, but it’s a little weaker than expected.”

Shares of Amazon fell as much as 13 percent in extended trading after closing at $313.18 in New York.

Third Quarter

For the third quarter, Amazon posted a net loss of $437 million, more than 10 times wider than the $41 million loss from a year ago. Sales rose 20 percent to $20.6 billion. Analysts had projected a loss of $331.4 million on sales of $20.9 billion.

The sales growth rate didn’t keep up with the rate of spending over the quarter. Amazon poured $21.1 billion into operations in the period, up 23 percent from a year earlier.

The company is spending earlier in the year to build its delivery network to prepare for the holidays, so those costs are showing up earlier as well, Szkutak said. A shift of customers choosing to rent textbooks as opposed to buying them also cut into sales growth, he said.

“We do have a lot of opportunities in front of us, but we certainly have to be selective with those opportunities,” he said on a media call today.

The fourth quarter is typically Amazon’s most lucrative, given an influx of shoppers who buy gifts for the holidays. Amazon is ramping up to be ready, saying earlier this month that it plans to hire 80,000 seasonal workers in the U.S. to help process orders, up from 70,000 last year. In the U.K., Amazon has said it will hire 13,000 workers for seasonal roles this year.

Buying Twitch

Meanwhile, the spending continues. In August, Amazon said it plans to buy video-game service Twitch Interactive Inc. for $970 million, one of its largest acquisitions to date, as it works to add more entertainment services.

Last month, Amazon introduced five new Kindle tablet models, including the $99 Kindle Fire HD, as it continues to seek more media consuming customers. The online company will open temporary pop-up stores in select cities such as San Francisco and Sacramento through the holidays to give shoppers a chance to see and try its electronics.

Amazon also debuted the Fire smartphone this summer in a competitive market versus Apple Inc.’s iPhones and Galaxy devices from Samsung Electronics Co. Amazon slashed the handset’s price to 99 cents weeks after the device began shipping.

“Whenever you launch something new, there’s a wide range of outcomes,” Szkutak said. “It’s also early. We just launched the phone 90 days ago in the U.S. and just started shipping in Europe.”

Amazon also secured a $2 billion credit line with Bank of America Corp. last month, giving it flexibility to continue investments in categories such as same-day grocery delivery, even if they aren’t immediately profitable.

The company remains embroiled in a public dispute with publisher Hachette Book Group about the pricing of digital books. Amazon and book publisher Simon & Schuster inked a deal this week that the companies said would make books affordable for readers while spreading the wealth among the online retailer, publisher and authors.

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