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Amazon Misses on Weak Sales

Amazon earnings
Amazon's (NASDAQ: AMZN) reputation as one of the tech sector's shining standouts during the recession may see some tarnishing after the e-commerce giant reported a 10 percent drop in second-quarter revenue, coming in below Wall Street estimates.

Net income decreased 10 percent to $142 million in the second quarter, or $0.32 per share, compared with net income of $158 million, or $0.37 per diluted share, in second quarter 2008.

Wall Street expected Amazon to report earnings of $0.31 a share for the quarter, according to Reuters Estimates. Revenue came in at $4.65 billion, 14 percent up from the $4.06 billion Amazon took in during the same period last year, but short of the Street's expected $4.69 billion.

Those figures excluded what Amazon described as a $227 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter. During the quarter, Amazon also booked much of a $51 million settlement with Toysrus.com. Additionally, second quarter 2008 operating income included a $53 million non-cash gain recognized on the sale of our European DVD rental assets.

The decline in revenue, along with thin operating margins -- 3.4 percent in the quarter, well below the 5 percent seen in the first quarter and less than the 4 percent analysts anticipated -- signaled a halt to the momentum Amazon had going into the earnings period.

Stagnant sales in the media category, which encompasses books, movies, video games, music and digital downloads, contributed to the company’s tepid earnings.

The company reported that North American revenue grew 13 percent to $2.45 billion, compared with 21 percent growth in the first quarter of this year.

CFO Tom Szkutak said North American media revenue was flat at $1.15 million, with declines in some categories, particularly videogames and videogame consoles, offset by growth in books.

“What you’re really seeing is an industry slow-down in video game and consoles,” said Szkutak, adding that video sales were being contrasted to a quarter in 2008 in which a number of major releases, such as the Wii Fit, were released.

During the call, executives declined to comment on Kindle sales figures, other than to say the company is happy with the e-reader’s growth, as well as on any upcoming strategies pertaining to sales tax laws in states where it operates the Affiliates program.

Analysts today expressed concerns over the weak numbers in the media category, saying it could signal long-term trouble as consumers increasingly purchase digital versions of music, movies and periodicals.

“We view 2Q09 as the first quarter in which this long-standing concern around Media has actually played out in the numbers," analyst Douglas Anmuth wrote in a Barclays Capital research note. "We recognize the tough 2Q comparison, and quite frankly, the North American Media comparisons get easier in the back half of the year, which should enable single-digit year-over-year growth over the next couple quarters."

“But it does raise the question of how Amazon will fare in the secular shift to digital media, particularly as it leads in books with the Kindle, but lags in Music (Apple leading) and Video (Netflix leading)," Anmuth wrote.

Ben Schachter, an analyst at Broadpoint AmTech, called media sales “anemic,” but said Amazon could rebound by the end of the year.

“The bottom line is that Amazon continues to execute well, particularly in growing its international business, and we expect accelerating growth into the second half of the year," Schachter wrote in a research note. "However, with its premium valuation, the stock demands exceptional results across the board, and we did not see that this quarter. We remain neutral on the shares, but would certainly get more constructive on any meaningful pull-back."

Last quarter, Amazon soundly beat estimates with a 24 percent increase in net income from the same period last year. The company also reported total sales for Q1 of $4.89 billion, up 18 percent from the first quarter in 2008.

Amazon's latest report also reinforced the fact that online retail, like many sectors of the economy, is being impacted by the recession -- despite some small indications that the situation might be improving. Amazon rival eBay (NASDAQ: EBAY), for example, beat analysts' estimates in its second-quarter results Wednesday.

Despite the unpleasant surprises in Amazon's earnings, executives were optimistic about their successes to date.

"We're pleased that customers saved more than $900 million with our free shipping offers, including Amazon Prime, over the last year," Jeff Bezos, founder and CEO of Amazon.com, said in statement. "We're staying heads down focused on providing customers low prices, vast selection, and fast delivery."

Analysts also reacted positively to yesterday's news of Amazon's acquisition of Zappos.

"We believe Amazon's acquisition of Zappos is a strong strategic fit for both companies," Anmuth wrote in a report. "Both are customer-centric businesses that are committed to the user experience and broad selection, and should benefit from the runway of e-commerce penetration going forward."

After having gross merchandise sales of $840 million in 2007 and $1 billion in 2008, Zappos is tracking toward $1.1 billion in 2009 sales, according to the report.

"The acquisition shows that Amazon will strategically acquire in certain e-commerce categories rather than completely following a build philosophy, though this deal could reduce the likelihood of another major acquisition in the near-term," Barclays's Anmuth wrote.

Next steps for Amazon

Looking to the numbers for the third-quarter for the e-commerce giant, net sales are expected to be between $4.75 billion and $5.25 billion, or to grow between 11 percent and 23 percent compared with third-quarter 2008, the company said.

Wall Street had previously expected third-quarter revenue of $4.92 billion, according to Reuters Estimates.

Operating income is expected to be between $120 million and $210 million, or between 22 percent decline and 36 percent growth compared with the third quarter of 2008.

Update includes comments from analysts and the earnings call.