Amazon says Fire sales scorching, but earnings disappoint

on Tuesday, January 31, 2012

Amazon says Fire sales scorching, but earnings disappointAmazon surprised investors by posting disappointing earnings this week, as surging costs continued to erode the company's profit margins.

Seattle, Washington-based Amazon said Tuesday that profit in its most recent fiscal quarter plummeted 57 percent. Amazon's net income declined to $177 million from $416 million the same period the year prior. Sales, on the other hand, rose 35 percent to $17.4 billion.

Still, analysts had projected sales at the world's largest online retailer would rise even higher in the quarter, forecasting an $18.3 billion median estimate. Moreover, Amazon said operating income fell to $260 million from $474 million in 2010. 

Nevertheless, many analysts said the company has suffered through periods of reduced profit margins in the past. Amazon chief executive Jeff Bezos is known for his aggressive and ambitious business strategies, and the online retailer has invested heavily in the development of new manufacturing facilities over the past year.

What's more, the company is rumored to be losing money on its latest product offering, the Kindle Fire, which is competing against Apple's iPad. Amazon said sales of the Fire were robust in the quarter, and analysts noted the company is not concerned with posting losses in the short-term. In fact, Amazon is much more focused on its long-term strategy for growth, one in which the Fire plays a critical role.

Though it is likely losing money on each Fire it sells, Amazon is hoping customers who purchase the tablet devices – which retail for $199 – will purchase books, music and other media through Amazon's online store. Some analysts' estimates suggest Amazon could ultimately make thousands of dollars from the sale of each Fire.

Regardless, the company's earnings took a beating in the most recent quarter. Amazon spent heavily on new production facilities in 2010 and as a result, it was unable to implement business cost reduction initiatives that would have improved profit margins. Ongoing supplier contract negotiations also hurt the company's earnings performance.

Still, Bezos emphasized the success of the Fire, affirming the tablet is poised for future dominance within the sector. He also said sales growth was solid in the fourth quarter and the company has positioned itself for continued success through its supply chain management and ongoing procurement auditing.

"We are grateful to the millions of customers who purchased the Kindle Fire and Kindle e-reader devices this holiday season, making Kindle our bestselling product across both the U.S. and Europe," he said in a statement. "Our millions of third-party sellers had a tremendous holiday season with 65 percent unit growth and now represent 36 percent of total units sold."

For its full fiscal year, Amazon said net sales jumped 41 percent to $48.08 billion from $43.20 billion in 2010. However, the company's 2011 full year operating income fell 39 percent to $862 million, and its net income declined 45 percent to $631 million. In the year prior, the company reported full year net income of $1.15 billion.

Amazon is banking on the success of the Fire to fuel future sales growth and preliminary figures suggest it could do so. The company noted Kindle unit sales, including both the Fire and e-reader devices, surged 177 percent during the nine-week period ending December 31. The online retail giant also noted the Fire has quickly become its bestselling, most gifted and most wished for product.

According to Bloomberg, Amazon traded at 141.9 times earnings over the past 12 months. The price-to-earnings ratio at Cupertino, California-based Apple, on the other hand, was 13. 

 

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