Earnings: Amazon reaches milestone with first full-year profit
Amazon decided to funnel that money into deep discounts on such products as books and DVD players, while offering free shipping on orders over a certain dollar amount. It's a strategy the company eventually chose to pursue for the long term.
"We've made a deliberate decision to go down a particular path," Chief Executive Jeff Bezos told analysts yesterday. "And that path is: Instead of giving the money to the television networks, to give the money back to our customers."
That basic formula, offering a wider product selection and lower prices to customers, resulted in record sales during the critical holiday shopping season and helped the online retailer achieve another milestone: its first profitable year.
For the fourth quarter, the company had a profit of $73.2 million, or 17 cents a share, compared with a profit of $2.7 million, or a penny per share, a year ago. Including foreign-exchange gains, the company said its profit was $96 million.
For all of 2003, the company reported a net profit of $35.3 million, or 8 cents a share, compared with a net loss of $149.1 million, or 39 cents, in 2002. Sales were $5.3 billion, a 33.8 percent increase vs. a year earlier.
While Amazon's results fell in line with Wall Street estimates, investors appeared more focused on the near-term impact of the discounting strategy on the bottom line. Amazon shares closed yesterday at $55.74, down $1.29, and dropped further to $53.88 in after-hours trading. The company reported its financial results after the markets closed.
At issue was Amazon's gross profit margins — the difference between what Amazon pays for goods and services and the price it charges for them. That measurement is an indication of how profitable it can become.
Safa Rashtchy, a senior research analyst for Piper Jaffray, said he had expected gross margins of 23.7 percent; they came in at 21.9 percent, largely a result of aggressive discounting in the company's international markets.
The result: Less of its record sales growth trickled to the bottom line.
Rashtchy said he understands the reasoning of spending money to build a long-term business. "It just doesn't look that pretty in the near term," he said.
Fourth-quarter sales rose 36.2 percent to $1.9 billion, benefiting by $98 million from changes in foreign-exchange rates.
Meantime, Amazon continued to improve the amount of cash on hand and said it would use part of it to pay down long-term debt.
For all of 2003, the company's free cash flow — the cash generated from operating activities, minus capital expenditures — rose 156.1 percent from the prior year, to $346 million.
Analysts consider it Amazon's most important measurement because it indicates the amount of cash that can be used to pay down debt, grow the business and return money to shareholders.
Amazon's board authorized a debt-repurchase program that would allow it to buy back as much as $500 million in debt.
Separately, Amazon announced plans next month to redeem $150 million in convertible subordinated notes.
Bezos told analysts the company has chosen to return some of its operating efficiencies to customers in the form of lower-priced products.
"We will for years and years consistently give back the gains to customers," he said. "We think it's the right way to operate this business."
The question analysts posed is whether Amazon needs to give that much away, now that it operates the largest online retail store.
"I think it's interesting that the thing they kept repeating was convenience, selection and price," said Morningstar analyst Joe Beaulieu. "I'm surprised that they can't do almost as well with two of those. You would think that the convenience and selection would be enough to attract a lot more customers."
Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com
Amazon's full-year results | |||
Figures in parentheses are losses | |||
% | |||
Annual | Dec. 31, 2003 | 2002 | Chg |
Profit | $35,282,000 | $(149,132,000) | |
Per share | 0.08 | (0.39) | |
Sales | 5,263,699,000 | 3,932,936,000 | +33.8 |