Amazon And The ‘Toys’ Gap

Sure, it lost $20 million after its former toy-selling partner Toys R Us won a court battle to leave Amazon.com’s selling platform.

And yes, Amazon.com’s marketing and technology investment costs are up, thanks to free shipping with its Amazon.com prime offering. Then there are all those new developers Amazon.com hired for its Web services plans to help smaller merchants plug into the Amazon.com selling platform.

But don’t worry, Amazon honchos told analysts today. Although the company’s profit of $22 million (5 cents per diluted share) for the second quarter was off by 58 percent from its year-ago profit of $52 million (12 cents per share), the online commerce king will see better growth again as soon as its new investments start to pay off.

Analysts, so hooked on the short term, wanted to know when.

During a conference call today, Amazon.com announced its operating income fell by 55 percent to $47 million in the second quarter from $104 million same time last year.

The culprits hitting the bottom line? Mostly new technology and content investments, lower prices including free shipping and Amazon Prime, and $20 million from a contract termination (Toys R Us), as well as related legal disputes that linger on from the corporate divorce from Toys R Us.

Its cash pile is down by 23 percent to $375 million for the trailing twelve months too, it said. Again, the main culprits: increased spending on new tech, content (more media) and a $40 million patent litigation settlement with e-commerce provider Soverain Software in third quarter 2005.

So, although net sales may have jumped by 22 percent to $2.14 billion during the quarter from $1.75 billion in the second quarter of 2005, CEO Jeff Bezos and CFO Tom Szkutak had a lot of selling to do on the company’s long-term investment strategy at play here.

The company’s lower operating margin this time around “incorporates all factors and what we expect for second half,” Szkutak told analysts. But Amazon.com’s own investment in its own toy-selling platform, which it just launched, is an “investment in people to run that category, and an investment in that selection,” he said. “We built this up very quickly and will continue to expand that over time.”

Not to mention the sales growth that came from the super shipping rates customers get with Amazon.com Prime, Bezos said, along with aggressive pricing in many categories.

But with more content planned, groceries even, and talk of even more categories for the retailing giant to lumber into, analysts express caution and so did investors.

Shares of Amazon.com had tumbled by just over 11 percent to $33.59 in after hours trading after the company released its results. But despite the long-term investment discussion, Amazon.com raised its full-year guidance on net sales to between $10.15 billion and $10.65, more than 20 to 25 percent higher than 2005.