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Last Updated: Thursday, 3 February, 2005, 21:21 GMT
Disappointing profits hit Amazon
The world's largest web retailer disappointed analysts
Shares in online retailer Amazon have fallen 14.6% in US trade, hit by weaker-than-expected profits.

Earnings rose sharply in the three months to December but investors were unimpressed as the figure had been boosted by a one-off tax-break.

Profits for the period rose 250% to $346.7m (184m), but with the $244m tax benefit stripped out, its profit per share fell from 82 cents to 24 cents.

Wall Street analysts had expected the company to post a 40-cent figure.

'Sore thumb'

Total revenues for the three months to 31 December were $2.54bn, up 30% from the $1.95bn for the same period last year, benefiting from record sales during the festive period.

Revenues were good, but margins are a disaster
Analyst Chris Baggini

Martin Pyykkonen, an analyst at Janco Partners, said Amazon's worsening profit margins "stuck out like a sore thumb".

"They're selling more stuff and making less profit margin on it," he said.

Fellow analyst Chris Baggini, manager of the Gartmore Growth Fund, was even more critical.

"Margins are well below expectations - revenues were good, but margins are a disaster."

Mr Baggini blamed the drop in profits on tough price competition from other online retailers.

Free shipping

In an effort to attract more customers, Amazon also announced on Wednesday that it would begin offering its US customers the option of paying a flat annual fee of $79 for unlimited free two-day delivery on orders.

In a letter to customers posted on the retailer's US website, Amazon chief executive Jeff Bezos said he expected the new program to be expensive for Amazon in the short-term but hoped it would build greater long-term loyalty.

Yet analysts said that while such moves may be good for the consumer, they squeeze margins - prompting concerns about profits in the face on rising competition.

"The fact is, Amazon is really facing a very difficult environment in the competitive landscape, and they're not acknowledging it," Piper Jaffray analyst Safa Rashtchy said.

Mr Rashtchy added that the company appeared to increase spending in areas such as marketing and new technology, merely to keep pace with other online merchants - not beat them.

For 2004 as a whole, Amazon reported profits of $588.5m on revenues of $6.92bn. That compares with 2003 earnings of $35m on revenues of $5.26bn.

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