July 22, 2010 / 12:23 PM / in 7 years

Amazon profit misses as costs surge

SAN FRANCISCO (Reuters) - Amazon.com Inc’s quarterly profit fell far short of Wall Street estimates, hurt by a 40 percent jump in expenses and by price cuts on its Kindle electronic reader, sending its shares down 14 percent.

The largest global online retailer spent more than investors had expected on everything from new staff to fulfillment centers, as it takes a bigger bite out of the traditional retail industry led by the likes of Wal-Mart Stores Inc.

The hugely successful introduction of Apple Inc’s iPad also pressured Amazon’s lead in e-readers. Amazon does not disclose how many Kindles it has sold, but said on Thursday the growth rate on their sales tripled after it cut prices on them.

Apple said this week it had sold 3.27 million iPads and was pricing the device aggressively as it tries to define the nascent tablet market.

“The main that that has happened -- because of the competition against the iPad -- they’ve had to slash the price on the Kindle, causing the company to take an upfront hit on profits and hindering margins,” said Frederick Moran, analyst at Benchmark Co.

Moran added that the company’s forecast for the third quarter looked low, though Amazon has a reputation for being conservative in its view of future results.

Amazon had posted blow-out results in its fourth and first quarters, but investors feared the momentum would stall this spring.

Total operating expenses rose 40 percent to $6.3 billion, with major increases in its cost of sales, marketing and technology and content investments.

“It kind of brings back fears that there would be overspending at Amazon on different operating projects,” said BWS Financial’s Hamed Khorsand.

FEAR OF OVERSPENDING

Amazon’s second-quarter net income rose 45 percent to $207 million, or 45 cents per share, from $142 million, or 32 cents per share, a year earlier.

Analysts, on average, had been expecting earnings of 54 cents per share, according to Thomson Reuters I/B/E/S. For a graphic on results, see: link.reuters.com/tas98m

Revenue rose 41 percent to $6.57 billion, just above the $6.54 billion expected by Wall Street. Revenue in North America rose 46 percent, versus 35 percent internationally.

Amazon forecast operating income in its third quarter to range between $210 million and $310 million -- representing a potential drop of 16 percent to a gain of 24 percent -- on sales of $6.9 billion to $7.63 billion.

Wall Street had been expecting operating profit of $360.8 million on revenue of $7.15 billion in the third quarter.

Operating margins in the quarter were 4.1 percent of total sales, above the 3.4 percent a year earlier, but below the 5.5 percent in the first quarter.

Amazon executives defended the jump in spending as the company increasingly goes up against traditional retail giants like Wal-Mart.

“Our operating expenses are increasing year over year related to capacity. We’ve been growing very, very fast,” said Chief Financial Officer Tom Szkutak, citing 13 new fulfillment centers the company is adding and additional support for its retail and web services units.

Szkutak also said the Kindle’s sales growth rate had tripled since the company lowered the price of the device to $189 for its most basic model.

“We are seeing very, very strong device growth and we are seeing very, very strong content growth,” said Szkutak. Amazon said that for every 100 hardcover books sold on Amazon.com, the company sells 180 e-books.

The Kindle also faces competition from Barnes & Noble, which recently cut prices on its own Nook e-reader.

Amazon Chief Executive Jeff Bezos addressed the extra competition from the iPad in a press release, saying “tablet computers could become a meaningful additional driver for our business.” Analysts say that iPad owners are buying e-books from Amazon’s Kindle store even though content is similarly available from Apple’s own digital bookstore.

Reporting by Alexandria Sage; Writing by Michele Gershberg; Editing by Gary Hill and Tim Dobbyn

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