Amazon posts fall in profit margins

Amazon.com posted a decline in profit margins this week as the cost of discounting overshadowed a robust rise in quarterly earnings and a bullish 2008 sales forecast which exceeded Wall Street targets.

Shares of the internet retailer, which trade at a huge premium to its peers, fell 11 per cent on fears a potential recession could hit Amazon's earnings.

Amazon established a European systems and network operations centre in the Digital Hub in 2005 and last year opened a customer support operation in Cork.

Margin contraction is a recurring worry among analysts who have watched the company spend on technology to attract new customers and discount shipping to keep buyers loyal.

But the fourth quarter was no exception to the worrying trend, with gross profit margin falling to 20.6 per cent from 21.3 per cent a year ago and 23.4 per cent in the third quarter. "That was disappointing," said Hamed Khorsand of BWS Financial. "It seems there was a lot of promotions, discounting in the quarter."

Global Crown Capital's Martin Pyykkonen said the company had implied its operating margins would be 5.5 per cent to 6.2 per cent in 2008, in line with the previous two years and compared with 5.7 per cent in 2007.

Chief financial officer Tom Szkutak said double-digit operating margins were "possible" but added: "If a high single-digit operating margin is the right thing to drive free cash flow, that's what we'll do."

Fears of weaker US consumer spending have unnerved investors in consumer companies, but pressed by reporters about how Amazon would fare, Mr Szkutak said: "Our business is fine.

"What we think going forward is reflected in our guidance," he said.

Asked whether Amazon had cut prices to the detriment of profit margins, Mr Szkutak said the company was continuously looking at pricing, and the fourth quarter was no different.

Amazon's spending has chipped away at profit in recent years but a 2007 pull-back helped spark a rally in its shares last spring. Mr Szkutak said its spending on technology and content will rise "somewhat less" in 2008 than revenue growth.

Net profit rose 112 per cent to $207 million (€139.25 million), or 48 cents per share, from $98 million, or 23 cents per share, a year ago. Sales rose 42 per cent to $5.67 billion in the quarter.

Operating income rose 38 per cent to $271 million.

Amazon was one of the high-flying tech stocks in the latter half of 2007, but much of that gain was lost in a recent sector sell-off on recession fears and disappointing forecasts from Apple, eBay and Yahoo. Wall Street concerns centre on how Amazon, the most popular e-commerce site behind eBay, will fare in a recession.

Amazon said it expects first-quarter net sales to rise 31 per cent to 38 per cent, to between $3.95 billion and $4.15 billion, and operating income of $155 million to $200 million.

Amazon forecast 2008 net sales of $18.75 billion to $19.75 billion and operating income of $785 million to $985 million, whereas Wall Street, on average, has expected $18.1 billion and $964 million.

At Wednesday's close, shares of Amazon traded at 46 times 2008 earnings, well above the Amex Internet Index average of 19. "Over time we would expect Amazon's multiple to contract as its growth rate decelerates, although its material margin expansion opportunity and likely positive Street estimates revisions will arguably make that contraction gradual and modest," said Citigroup analyst Mark Mahaney.