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Amazon Posts 58% Drop in Earnings

July 26, 2006|From Reuters Inc. on Tuesday reported a 58% drop in second-quarter profit and cut its earnings outlook for the year because of stepped-up investment in its toy business and lower prices on many products. The company's shares fell 11% in after-hours trading.

Wall Street has fretted over slowing sales growth and falling margins at Seattle-based Amazon, the Web's second-most popular commerce site behind EBay Inc. A discount shipping program, Amazon Prime, has been costly. The company faces intense competition, and spending on technology and content has crimped profits.

Global Crown Capital analyst Martin Pyykkonen said Amazon Prime did not appear to be stimulating sales growth in the way many had hoped. In the year-earlier quarter, sales rose 26%, compared with 22% this quarter, he said.

"Although the Amazon Prime may be having some shipping impact, it's not a windfall for the company," Pyykkonen said.

The Internet retailer posted quarterly net income of $22 million, or 5 cents a share, compared with $52 million, or 12 cents, a year earlier. Sales rose 22% to $2.14 billion, in line with Amazon's forecast.

Operating income fell 55% to $47 million. A contract termination and related fee dispute with Toys R Us Inc. hurt results by $20 million, the company said.

Excluding that $20 million, Amazon earned 7 cents a share, matching Wall Street analysts' average estimate for earnings excluding one-time items, according to Reuters Estimates.

Amazon met its own forecasts for operating income and sales. Its second-quarter forecast for operating income ranged from $32 million to $67 million, with revenue of $2.03 billion to $2.18 billion.

Amazon also raised its revenue forecast for the year slightly, although one analyst characterized it as negligible.

Looking to the third quarter, Amazon said it expected sales of $2.17 billion to $2.33 billion. Analysts, on average, anticipate third-quarter sales of $2.21 billion, according to Reuters Estimates.

For the year, Amazon said it expected sales of $10.15 billion to $10.65 billion, up from a previous estimate of $9.95 billion to $10.50 billion. Wall Street analysts expect sales of $10.15 billion, according to Reuters Estimates.

But Amazon forecasts lower operating income for the year of $310 million to $440 million. That compares with a previous forecast of $390 million to $520 million.

On a conference call with reporters, Chief Financial Officer Tom Szkutak said that was primarily because of heavy investment in its toy business in the second half of the year and lower prices in existing categories.

Amazon shares fell to $29.80 after hours. During regular trading, they fell 72 cents to $33.59.

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