Those who had hoped Amazon.com could completely avoid the problems plaguing other retailers got a reality check on July 23, when the company missed Wall Street forecasts for sales and posted its first year-over-year profit decline in two years.
The Seattle retailer posted net income of US$142 million in the second quarter, a 10 percent drop from the same period in 2008 and the first such decline since December 2006. Sales improved 14 percent, to US$4.65 billion, but narrowly missed Wall Street's expectation of US$4.7 billion.
Thrown Off by Toys "R" Us Settlement
Amazon's stock, which has surged more than 80 percent since the beginning of the year, fell 6.6 percent in after-hours trading, to 93.87. "Any time you've had a stock at this high a valuation, you expect to see everything right," says Broadpoint AmTech analyst Ben Schachter.
In a call with analysts, Chief Financial Officer Thomas Szkutak said the profit decline was due to a US$52 million settlement the company paid in June to resolve a dispute with Toys "R" Us. The retailer had claimed Amazon violated a partnership by neglecting to keep its products in stock and allowing other toymakers to sell on the site. Without the payment, Amazon's profits would have increased. "It was a good quarter but not a great one, and the huge legal settlement to Toys 'R' Us really made a big difference," says Gene Munster of Piper Jaffray.
Amazon has weathered the financial crisis better than most retailers. With the drop in housing prices and stocks, consumers have cut back on their spending on a wide variety of products. Several prominent traditional retailers have filed for bankruptcy protection, including Circuit City, Sharper Image, KB Toys, and Linens 'N Things. The National Retail Federation expects total retail sales this year to shrink by 0.5 percent, to US$2.27 trillion, the first such drop in more than a decade.
In general, online electronics retailers have fared better than their brick-and-mortar competitors, says NPD Group analyst Stephen Baker. "These [online] shoppers tend to be more recession-proof. A lot of these customers are more affluent and less affected by the recession. You also have the geeks who will just spend a higher percentage of their disposable income on electronic gadgets regardless of the economic climate," says Baker.
Flat Media Sales
Analysts were concerned that sales in the US in what Amazon calls its media category, which includes books, movies, video games, and digital downloads, were flat for the quarter, at US$1.1 billion. This could be the result of more customers downloading MP3s and e-books rather than ordering higher-cost CDs and books, according to Jeffrey Lindsay, analyst with Sanford C. Bernstein. "People are a little bit worried that the business is seeing a greater top-line impact from [a shift to] digital downloads," he says.
Internationally, sales of media were up 3 percent from the previous quarter, to US$1.3 billion. Lindsay notes that Amazon has still only made its Kindle e-book reader available in the US--evidence that the device may be causing some cannibalization in book sales.
Amazon says that overheated video game sales in the spring of last year, when game makers released several blockbusters, led to a sharp decline in the category this quarter. Amazon does not break out video game sales, but Hudson Square Research analyst Scott Tilghman buys Amazon's explanation. "They were up against an extremely strong comparison. You had new releases of Grand Theft Auto, Wii Fit, and Guitar Hero. Across that category you have had a 20 percent to 30 percent drop throughout the domestic industry over the past several months," says Tilghman. This year's big game releases are planned for the second half of the year.
Gaining on eBay
Amazon, the largest e-commerce company, continues to draw in other merchants that sell through its Web site. That line of business has put it into more direct competition with eBay, which has long had other merchants sell through its Web site. In the second quarter, Amazon's third-party sales on the site made up 30 percent of revenues, a figure that has remained relatively constant. When eBay reported its earnings on July 22, it showed no change to its amount of registered users. Bernstein's Lindsay says that instead of outright poaching merchants from eBay, Amazon is sharing them. "A lot of eBay sellers now have become dual sellers--they're selling on both Amazon and eBay," he says.
Still, Amazon is gaining ground on its rival in traffic. In June, Amazon's traffic grew by 10.5 percent, to 63 million unique visitors, while eBay's dropped 2.7 percent, to 71 million, according to market researcher ComScore.
Amazon cast a wide net in giving guidance for the third quarter. It expects to grow revenues 11 percent to 23 percent over the same period in 2008, from US$4.75 billion to US$5.25 billion.
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