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Amazon's Amazing Fourth Quarter


Being bullish on Amazon.com proved to be a smart bet in the fourth quarter. Even as traditional retailers founder amid the worst economic malaise since the Depression, the pioneering e-tailer under CEO Jeff Bezos is using competitive pricing and an ever-expanding arsenal of services and products to produce better-than-expected results.

In the fourth quarter, Amazon (AMZN) lured customers and gobbled up market share, producing results that crushed Wall Street expectations. Revenue jumped 18% during the quarter, propelled in large part by overseas shoppers who—though shopping less—are spending more of that shrinking budget online. International sales rose 31%.

"This company is executing flawlessly," says Scott Devitt, an analyst at Stifel, Nicolaus. "Pretty much everything is going well in a sea of disaster, and the market-share gains are unbelievable, in terms of how they are growing, vs. the industry." Net income rose to 52¢ a share on revenue of $6.7 billion, compared with analysts' expectations of 39¢ a share on $6.4 billion in sales.

Kudos for the Kindle

Amazon also trumpeted sales of its electronic book reader the Kindle, though it didn't disclose unit or dollar sales. "We are pleased with the demand," Amazon Chief Financial Officer Thomas Szkutak said during a conference call with analysts and investors. "It exceeded our expectations and we're excited to see the growth that we've seen since we launched it." On Feb. 9, Amazon is due to make an announcement that some analysts speculate will be the launch of the next version of the Kindle.

Analysts were also encouraged by Amazon's projections for the early part of this year, even if the company gave itself wide latitude, since many had expected a dour outlook for 2009. Amazon expects first-quarter sales of $4.53 billion to $4.93 billion, indicating 9% to 19% growth. Analysts were expecting about $4.55 billion in revenue. Operating income for the same period is expected to be $125 million to $210 million. That leaves the midpoint at $168 million, a few million below some analysts' projections, though not enough for real concern, Devitt says.

Amazon was up front about its reliance on price cuts to attract buyers. "It was a very competitive pricing environment," Szkutak said. "One of the reasons you see the growth we provided is because of the pricing."

Discounts Not Too Deep

Yet the results suggest the discounting wasn't as deep as some analysts had thought. Concern that the company had slashed prices emerged after Amazon a month ago called the 2008 holiday season its "best ever." The operating margin, a yardstick of profitability, narrowed to 4% from 4.8% a year earlier, but was nevertheless 0.5% higher than expected, says Jeffrey Lindsay, an analyst at Bernstein Research. "It looks as if they haven't had to discount to any (greater) extent that we thought," he says.

Devitt chalked up the margin pressure to increased spending on shipping costs—for instance, by covering more products with cheap shipping and signing up more people for Amazon Prime, a program that provides free shipping for customers who pay a $79 annual fee.

Amazon follows Google (GOOG) and Netflix (NFLX) in releasing results that show some pockets of the tech sector are shrugging off the worst of the recession.

Gaining Ground on eBay

Amazon's results stand in contrast to those of competitor eBay (EBAY). While eBay is the most heavily trafficked online retailer, Amazon is gaining ground. In December, Amazon traffic jumped by 9.8% from a year earlier, while eBay's traffic dropped 2.5%, according to ComScore (SCOR).

Buoyant results aside, there's room for caution. That's why Amazon gave such a wide range in its growth estimates and didn't provide a full-year forecast. The full impact of the recession might not be felt until later in 2009.

But even if Amazon's sales take a bigger-than-expected hit, the company may nevertheless outperform the rest of the industry. Fourth-quarter e-commerce sales slipped 4%, according to ComScore. Traditional retail sales dropped 2.8% during the period that includes November and December, according to the National Retail Federation. And this year, the NRF forecasts that traditional retail sales will drop 0.5%.

Green is an associate editor for BusinessWeek .


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