Bloomberg News

Amazon.com Jumps as Kindle, Digital Media Fuel Sales Growth

July 27, 2011

(Updates with closing shares in the fifth paragraph.)

July 27 (Bloomberg) -- Amazon.com Inc., the world’s largest online retailer, gained the most in a month after its Kindle e- reader and digital-media services helped second-quarter sales and profit beat analysts’ estimates.

Net income was $191 million, or 41 cents a share, compared with $207 million, or 45 cents, a year earlier, the Seattle- based company said yesterday in a statement. That compared with 34 cents that analysts predicted. Net sales rose to $9.91 billion, compared with the $9.38 billion projection.

Amazon is benefiting from surging Kindle sales, propelled by customers ditching paper books in favor of electronic versions. Chief Executive Officer Jeff Bezos also is investing in online entertainment and opening new distribution centers to increase growth. While that spending is weighing on profit margins, the soaring revenue is pleasing investors, said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco.

“We’re seeing continued robust revenue growth, better than expected,” he said. Sebastian has an “outperform” rating on the stock, which he doesn’t own. “Amazon is running on all cylinders, despite the pressure on its margins.”

The stock rose $8.34, or 3.9 percent, to a record closing of $222.52 at 4 p.m. New York time on the Nasdaq Stock Market, for the biggest gain since June 27. The shares have climbed 24 percent this year.

Profit Forecast

The company forecast operating profit of $20 million to $170 million this quarter, with sales of $10.3 billion to $11.1 billion. The outlook included $180 million in stock-based compensation and the writedown of intangible assets. Analysts had estimated operating income of $311.7 million and revenue of $10.4 billion.

“Spending continues at a fairly aggressive pace and the guidance for third-quarter operating income and earnings looked a bit below what we were expecting,” said Fred Moran, an analyst at Benchmark Co. in Delray Beach, Florida. “It’s not really a surprise to Wall Street because Amazon’s management has been forthright that they would be reinvesting heavily in the business for an extended period of time.” Moran recommends buying shares of Amazon, which he doesn’t own himself.

The company will invest in more than 15 fulfillment centers this year, Tom Szkutak, Amazon’s chief financial officer, said yesterday on a conference call.

“This is the strongest growth we’ve seen -- both in terms of percentage growth on a dollar basis as well as local currency growth -- in over 10 years,” he said. “Because of that, what we see looking forward is we’re investing a lot in capacity.”

Tax Disputes

The online retailer has fought attempts by California, New York, Texas, Rhode Island and North Carolina to force it to collect sales taxes on purchases, saying the moves infringe on the federal government’s power to regulate commerce among states. The company cut ties with 10,000 California-based affiliates after Governor Jerry Brown signed a law imposing the tax on Internet retailers with a physical presence in the state.

Amazon also is promoting its online entertainment services. The company reached an agreement with CBS Corp. this month to let customers of its Amazon Prime service watch thousands of episodes of TV shows, including “Numb3rs and ‘‘Medium,’’ at no additional cost. The Amazon Prime program, which provides unlimited two-day shipping, costs $79 a year.

Music Offerings

In an effort to compete with music offerings from Apple Inc. and other rivals, Amazon increased the amount of space available to users of its music storage service and began offering a music application that plays songs on Apple’s iPad.

Book orders are increasingly shifting to electronic versions, helping Amazon sell its Kindle e-reader. Amazon may have sold more than 8 million Kindles last year, accounting for about 5 percent of sales, according to Benchmark. Amazon refers to the device as its best-selling product, without disclosing exact figures.

Sales of the Kindle and electronic merchandise ‘‘are two big drivers for Amazon that continued unabated,’’ Benchmark’s Moran said.

--With assistance from James Nash in Sacramento, California, and Zachary Tracer in New York. Editors: Nick Turner, Lisa Rapaport

To contact the reporter on this story: Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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