How Hard Should Amazon Swing?
Deena Maerowitz, a busy Washington lawyer, had no doubts about where to do much of her holiday shopping this year. When it came to buying gifts, including two Olivia the pig children's books, a bearded-collie calendar, Star Wars games, and two Angel Barbies, she went straight to Amazon.com (AMZN ). A few clicks, and $150 worth of presents were on their way--no wrapping or waiting in line at the post office required. "I had a great experience with Amazon," she says.
Plenty of holiday shoppers have that same satisfied glow. They snapped up 37.9 million items from Amazon.com Inc. and its merchant partners from Nov. 9 to Dec. 21--22% more than last year, according to the company's Delight-O-Meter online tracking service. As a result, Amazon is expected to meet or beat Wall Street's revenue estimates of $1.01 billion in the fourth quarter. More important, it should finally achieve the closely watched pledge of founder and CEO Jeffrey P. Bezos to hit pro forma operating profitability.
So, is Amazon out of the woods? Hardly. In its bid to reduce losses, it sacrificed sales growth by cutting marketing expenses 17% last year. When the final numbers come in on Jan. 22, 2001 revenues probably will be up just 9%, to about $3 billion, down dramatically from 69% growth in 2000. A major drag was its core books, music, and video business, where sales dropped 5% in 2001. And unlike Amazon's pro forma numbers--which omit such things as interest expense and restructuring charges--real profitability remains far off. At best, it isn't expected until 2003.
The question is, can Amazon pump up its growth rate while still improving profitability? That depends on whether it can make money off of its expansion into new products, such as consumer electronics, and bolster its business of managing other retailers' online storefronts. If not, Amazon may end up as just a niche merchant of books, music, and videos. "Amazon hit an important milestone, but it's just that--a milestone," says Mark Rowen, an analyst at Prudential Securities Inc. "They have a long way to go yet."
The e-tailer is making some progress. Electronic gadgets such as DVDs, as well as kitchen appliances and tools, flew out of its warehouses this Christmas, making up 19% of sales this year, vs. 10% in 1999. Still, investors don't yet know if it is cutting losses in these newer categories.
One litmus test will be progress in consumer electronics. Those were a bright spot in holiday sales this season. Competing portal Yahoo! Inc. (YHOO ) reported that digital cameras and other such gear helped boost sales 86% at its virtual mall this Christmas. But unlike Yahoo, which simply takes a cut of the sales of merchants who market via its site, Amazon actually stocks products. So it faces a tougher challenge in efficiently managing its merchandising and fulfillment. Gross margins of 10% to 12% don't allow room for error.
Another key area is the performance of Amazon's increasingly important business running online stores and handling order processing for traditional retailers such as Toys `R' Us (TOY ), Borders (BGP ), Target (TGT ), and Circuit City (CC ). The unit brings in gross margins of 60% and up for Amazon because the partners own the inventory. But it does less for revenue growth, since Amazon books only service fees and a cut of sales. Still, those service revenues were expected to increase 20% in 2001, to $237.2 million, says Prudential's Rowen. If that trend continues, fulfillment deals could go a long way toward better utilizing Amazon's expensive warehouse investments.
If not, Amazon may have to bite the bullet and shutter warehouses and weaker businesses. But that would cut off its growth prospects. "Unless the services business grows a lot more or they can drive substantially more profits out of their products, I am not sure they are a worthwhile investment," says Lauren Cooks Levitan, an analyst at Robertson Stephens.
Even if the company is on the right track, most observers expect slow, steady progress, not the fireworks of past years. For Amazon, the holidays were fun. Now it's back to work.
By Heather Green in New York