The Day Ahead: Amazon learns new word (profit), Wall Street cheers

This just in: Aliens have abducted Amazon.com executives and replaced them with clones that speak the language of profits, accountability and operating excellence
Written by Larry Dignan, Contributor

If you tuned in to Amazon's conference call last night, that X-Files-like theory wouldn't sound so far-fetched.

Sure Amazon missed estimates and reported a record fourth quarter net loss, $323m (£200m), to go with its record sales ($676m), but the company's tone changed big time. Maybe Amazon sensed patience was wearing thin on Wall Street. Or maybe the executive team was taken over by bodysnatchers. In fact, Amazon had no choice but to set out some profitability guidelines -- shares weren't going anywhere.

Amazon.com now has a profit roadmap (sort of) and analysts will gush about the e-tailer. We have no idea how big these alleged profits will get, but just thinking about profits is a good start for Amazon.

Amazon.com's message: The worst of the losses is over. Could Amazon possibly lose more money? Chief financial officer Warren Jenson said its fourth quarter operating loss was at the "high point" and would come down throughout 2000.

And CEO Jeff Bezos actually mentioned the "P" word for profits. Bezos previously acted like profits were the scourge of humanity.

"We have reached a tipping point in the business," said Bezos. He cited six goals: boost customer count, pursue operational excellence, continue to expand, expand internationally, partner with other e-tailers, and "drive toward profitability in each and every business we're in."

Bezos also said margins would improve substantially. "Our investment curve should be less steep and our time to profitability should be shorter," he said. "We expect overall losses to decrease."

Jenson divided Amazon's businesses into groups. In the fourth quarter, operating losses for its retail business (books, music, toys etc.) were 20 percent of sales. A year from now, Jenson said operating losses would be 5 percent of sales, including any new retail stores. That projection will lead many analysts to conclude that Amazon can turn a profit in 2001.

"In 2000, we will reap the benefits of scale," said Jenson, who said gross margins would approach 20 percent in the first quarter and could improve throughout the year.

Joe Galli, chief operating officer, said Amazon would strive to become more efficient. General managers would now have to watch costs and inventory levels.

Amazon gave Wall Street everything it wanted and won back some credibility. The company, which spends only $19 to acquire a customer, even broke out sales by category. The e-tailer is the clear leader in books and music and the second biggest toy seller behind eToys.

Of course questions still linger. Will Amazon be profitable in 2001? Will Amazon be able to deliver on its newfound discipline? Will Amazon still look like just another retailer in the long run? How much money can Amazon actually make? Will most of the profits come from recent landlord deals with other e-tailers? You get the idea.

If you want to know how Wall Street analysts will react to Amazon's outlook, all you have to do is look at what happened in January. We'll use Merrill Lynch analyst Henry Blodget as the guinea pig.

After Amazon preannounced its fourth quarter sales in early January, investors panned the stock for its profit outlook.

In a January 6 research note, Merrill Lynch analysts Blodget and Dan Good weren't optimistic. "We continue to believe that Amazon's expenses must be brought under control for the company is to re-develop strong credibility with the Street," said the Merrill duo in a report. "Revenue growth was strong but not spectacular-in other words, very similar to the performance throughout 1999."

Blodget, however, came around quickly. Our hunch is that the January 6 comments were more Good's than Blodget's.

Amazon launched a series of partnership press releases after its preannouncement. The company first inked a broad pact with Drugstore.com and Greenlight.com.

Blodget in a January 24 research note: "At these levels ($60-$70), we think Amazon will be a good stock for the rest of 2000. One of Amazon's largest and least appreciated assets is its audience and customer base-and the commerce deals allow the company to 'monetize' this asset."

Last week, Amazon said it was laying off 150 employees, but officials spun the media pretty well. No one asked about the layoffs on the earnings conference call.

On Monday, Amazon said it bought a stake in Audible in a deal where Audible will give the online retailer $30m over three years.

On Tuesday, Amazon bought a stake in Living.com in exchange for promotion.

Those deals had Blodget thinking about the "P" word for profits and put him firmly back in the Amazon camp. In a February 1 research note, Blodget gushed about Living.com and said the e-tailer's recent deals "added approximately $130m in incremental, high margin annual revenue."

"A quick calculation suggests that if this revenue and profit is actually incremental to our model, then Amazon could be profitable by 2001," said Blodget.

Blodget wasn't done. In a February 2 research note, Blodget sent his Amazon earnings preview. In a note, Blodget said he expected Amazon to miss estimate because of an inventory writedown and outlined metrics to watch (revenue, customers, margins etc.), but didn't sweat about rising expenses or the company's credibility.

Blodget was won over easily by Amazon's flurry of strategic pacts. Just imagine what he'll be saying today.

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