Despite Better Q4 and Year, Wall Street Sours on Amazon

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So much of the news was positive when Inc. released its full-year and fourth-quarter 2004 results Feb. 2.

Operating cash flow for the year was $567 million compared with $392 million in 2003. Free cash flow was $477 million, up from $346 million in 2003. Net sales reached $6.92 billion compared with $5.26 billion the previous year. Operating income totaled $440 million versus $271 million in 2003.

Fourth-quarter numbers also were up. Net income jumped to $347 million from $73 million in Q4 2003. But included in the company's release was the benefit from realizing a $244 million deferred tax asset. Excluding that, fourth-quarter pro forma net income would have been $149 million, or 35 cents per diluted share. The Associated Press reported that analysts polled by Thomson First Call were expecting income of 40 cents a share, with estimates varying from 32 cents to 46 cents.

Wall Street reacted quickly. After closing at $41.88 on Feb. 2, Amazon finished trading the next day at $35.75. For the month, the stock fell almost 17 percent, from $42.48 on Feb. 1 to $35.39 on March 1.

"The picture is getting worse: more spending, steeper decline in margins and no clear explanation for increased spending or when we will see the benefits," Safa Rashtchy of Piper Jaffray wrote in a research note, according to Reuters.

According to AP, analysts suspected Amazon's results were affected by increasing competition from "up-and-coming online retailers and from traditional stores" selling goods online. AP also said Amazon lost $197 million on shipping alone last year.

The tax gain was from losses incurred in prior years, said chief financial officer Tom Szkutak, who expects Amazon to continue to record such benefits in future quarters.

MarketWatch said the Seattle company is being forced to raise spending on free shipping "and other marketing promotions to win and keep customers" who are able to buy CDs, books and videos from other e-tailers.

"The primary investment risks are continued pricing pressure from other online retailers, limited pricing power and the profit margin burden of free shipping," Janco Partners analyst Martin Pyykkonen told MarketWatch. Pyykkonen kept his "sell" rating and $20 price target.

One analyst didn't think much of the company's introduction of "Amazon Prime." For an annual membership fee of $79, members get unlimited, express two-day shipping for free with no minimum purchase requirement. They also receive one-day, overnight shipping for $3.99 per item.

"We think the program risks paying customers to be less profitable by driving down average order volume," wrote Aram Rubinson, a Banc of America Securities analyst who, according to MarketWatch, maintained his "sell" rating and $26 price target. "At $79, we don't expect many takers, but the threshold is likely to fall."

In other Portfolio news, Henry Schein Inc. (HSIC) has been adjusted for a 2-for-1 stock split.


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