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Last Updated: Wednesday, 22 October, 2003, 16:17 GMT 17:17 UK
Will Amazon please in 2004?
By Bill Wilson
BBC News Online business reporter

Amazon's high volume, low price strategy is paying off

By reporting a profit for the first time outside a holiday quarter, Amazon.com has analysts divided over whether the company can repeat this achievement on a regular basis.

What has alerted e-commerce watchers is that the quarterly profit, in the three months to September, has come for the first time outside of the key Christmas sales period.

Thanks to free delivery offers and a new sporting goods store, Amazon boosted its revenue by 33%, up from $851m to $1.1bn. And net profit was $16m.

Yet the figures were not as good as some had expected, and their shares, which on Tuesday reached their highest levels since May 2000, fell more than 2% following the announcement.

Despite the Amazon share price trebling in the past year, some analysts have been questioning how strong the business really is.

Dan Geiman, an analyst with McAdams Wright Ragen in Seattle, said: "Taken on its own merit, it was a great quarter for them.

It is doing so well on its core sales areas that it is competing with its bricks-and-mortar counterparts such as WH Smith in the UK
Philippe Poutonnet, analyst at Jupiter

"But if you look at it from an investor's standpoint, they didn't beat expectations by quite as much as they did in the past, and the guidance for 2004 is a little conservative compared to what you've seen over the past quarters."

However, Philippe Poutonnet, a retail analyst at Jupiter, said: "It has been a very strong quarter for Amazon, helped by their move into different new categories around the world which is bringing in new business.

"They have moved into electronics in Japan, sports goods in the USA, and kitchen goods in the UK, and this is one of the reasons for their strong performance.

"This is only the third quarter they have been in profitability, and the first outside of Christmas - with a strong current quarter it looks like 2003 will be the first year they show an overall profit over 12 months.

"This will be a huge development for them, not only because of the financial side, which everyone is looking at, but because it also shows an increased sales penetration."

'New products'

Amazon has excellent on-site marketing, and its ability to make buying suggestions to the customer puts them at a great advantage.

Now the question is whether they can keep growing in their key areas of books, CDs, and DVDs, or whether they will have to keep expanding beyond their core areas.

Mr Poutonnet said: "It is doing so well on its core sales areas that it is competing with its bricks-and-mortar counterparts such as WH Smith in the UK.

"Its customers are no longer just "techies", or restricted to the 16 to 35 age group - it is selling to a wide range of people of all ages.

They came in modestly above forecasts, but I think expectations were that they could have done much better
Jeetil Patel, Deutsche Bank Securities

"It is in a healthy position, and may well be considering introducing even more new product lines."

And Mr Geiman says: "They have this customer base that in general is fairly devoted. It is just expanding selection so they can fill everybody's taste and drive down the costs at the same time."

Amazon has given an upbeat assessment of trading in the current quarter, predicting sales growth of between 24% and 34%.

It said it also expects 2004 sales of $5.75bn to $6.25bn, a rise of 10% to 20%.

But Mr Geiman warns: "It could be tough for Amazon to boost sales as much next year - one possible reason for the conservative estimates of next year's business, and for the market's negative reaction on Tuesday."

Amazon has successfully moved into the online auction market, and customers are able to sell their used books online.

But it is in its core markets - books, videos, and DVDs - that the online retailer is making most progress.

'Prominent online'

Analysts at Jupiter expect online sales of books, DVDs, and videos, to increase by a whopping 47% over the coming year, which appears to put Amazon in a very strong position.

Mr Poutonnet said: "The future looks very healthy for Amazon, they can branch into different products in different parts of the world, but they can continue to sells lots of books and videos.

"Their position as a prominent online retailer will remain, while they continue to challenge book shops."

Mr Poutonnet believes that there is further room for growth in countries such as France which are still slightly wary about e-commerce overall.

Amazon.co.uk's managing director Robin Terrell said Amazon's strategy, of heavily discounting stock and offering free delivery on many items, was a success reflected in the quarterly results.

However a final word of warning comes from San Franciso-based Jeetil Patel, an analyst at Deutsche Bank Securities, who said: "They came in modestly above forecasts, but I think expectations were that they could have done much better."

Robin Terrell, Amazon UK managing director
"Part of it is just sellng more stuff"

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