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Long Tale Still Written in Red Ink

Internet: Analysts question how long the Web-based retailer can hang on as its stock falls and customers bail.

July 21, 2001|DAVID STREITFELD | TIMES STAFF WRITER, the first and most celebrated Web retailer, is now the last big one standing. And not very solidly.

On Monday, Amazon is expected to report its 17th consecutive unprofitable quarter, a money-losing streak with few precedents for a company its size in American business history. Yet, by the end of the year, Amazon says, it will achieve a very loosely defined version of profitability.

But that's a mirage, argues a significant group of analysts and critics. Amazon, they say, will crash just like the hundreds of e-commerce ventures, from to ValueAmerica to to eToys, that it inspired.

"I see a real risk of outright bankruptcy," said Robert Tracy, an analyst with the financial site "If you look at their financial statements, it's pretty obvious."

Amazon still has plenty of supporters who expect the company to eventually join the handful of profitable Internet companies, such as auction firm eBay. According to one survey, 16 of 31 financial analysts who follow Amazon still recommend buying the stock.

A few years ago, however, everyone was on their bandwagon. The company's early promise helped fuel the investment gold rush that spent tens of billions of dollars to start new Net companies. No other e-commerce company has received as much hype or made as many sales as "the Wal-Mart of the Web." Any meltdown of Amazon would represent an epic failure. And it may kill the notion that a pure Internet retailer can survive and thrive, and diminish further the once wondrous prospects for e-commerce.

"We went through a stage where online retailing was going to conquer the world. No one was ever going to go to a mall again," said Eric Von der Porten of Leeward Investments. "But now it's going to settle down."

In its bid to reinvent shopping, Amazon to date has sold $5.9 billion in books, toys, cell phones and hammers to 32 million consumers, but in the process it's piled up $2.7 billion in debt. Amazon has been forced to retrench everywhere, from closing a state-of-the-art distribution center to laying off 1,300, or 15%, of its staff to canceling plans for a new headquarters building. Some of Amazon's suppliers have expressed nervousness about whether they will continue to get paid, and it loses half of its customers from year to year.

Things have come full circle for the retailer. When Amazon opened its virtual doors six years ago in founder Jeff Bezos' Seattle garage, it was a radical idea to market physical goods through this new thing called the World Wide Web. In the first month, Amazon sold books to people in every state and 46 countries, but for a long time it wasn't taken seriously. When the company went public in 1997, some analysts asserted that it wasn't a real business, just a middleman that anyone could imitate and improve on.

Consumers didn't pay any attention, happily buying ever-expanding quantities of books, CDs and videotapes. Amazon's sales leapt from $16 million in 1996 to $148 million the next year and $610 million the next. Bezos, 37, a former Wall Street executive, became a celebrity, then a paper billionaire, then Time magazine's person of the year. The stock grew from $1.50 a share to $113, fueled by analysts' forecasts that 20% of all retail would be conducted online, much of it at Amazon.

Yet through all of this, the red ink continued to flow. At the end of last year, the retailer's working capital--basically, its cash minus its short-term debts, and a good indicator of a retailer's health--was $386 million. At the end of the first quarter this year, it was $251 million.

The quicker Amazon's working capital shrinks, the faster the end will come, according to Ravi Suria, a former Lehman Bros. bond analyst. A year ago, Suria issued a controversial and influential report that predicted Amazon would run out of cash early in 2001 unless it curtailed some of its free-spending ways. The company did start cutbacks last winter, just as Suria issued a second report moving the day of doom back to the end of this year.

Suria, who now works for a private investment partnership, argued that the disappearing cash would unnerve Amazon's thousands of vendors. Worried they wouldn't get paid, these suppliers would insist on getting paid before they shipped their merchandise to Amazon's warehouses.

Amazon dismissed Suria's credit squeeze report as "silly and chock full of errors." The company went on the offensive, stressing in many media interviews that relations with its thousands of vendors had never been better.

"I just laughed when I heard that," said an executive at one electronics vendor. "Amazon played the slow-pay game with us for about a year." The executive, who agreed to talk if neither he nor his firm was named, finally gave up and scaled back his shipments to Amazon by 90%. "That's a safer bet," he said.

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