Amazon's Got It Going On

Welcome to the "I told you so" era in the Amazon.com (Nasdaq: AMZN  ) timeline. Coming through with spectacular results for the quarter that ended in March, the leading online retailer laid to rest the notions that e-commerce of hard goods can't be profitable, that a retailer is tethered to holiday seasonality, and that a behemoth can't accelerate its top-line growth.

Net sales soared 32% higher for the period to top the $3 billion mark. Earnings per share more than doubled to $0.26 a share. Clueless analysts had been expecting the company to earn just $0.15 a share on $2.9 billion in net sales. Here's how things have stacked up recently for the company.

Quarter

Sales Growth (YOY)

Q1 2006

20%

Q2 2006

22%

Q3 2006

24%

Q4 2006

34%

Q1 2007

32%

Yes, there's a slight drop this time around. After accelerating sales sequentially throughout 2006, Amazon may feel mortal. However, 32% is far better than the 20% top-line spurt it recorded a year earlier. Even if you factor in currency-exchange gains, Amazon still smoked last year's showing.

And since we're talking about foreign legal tender, let's applaud Amazon for its ability to grow overseas. North American sales now make up less than 54% of net sales. Gross margins aren't as kind overseas, though Amazon expects improvement there as those markets mature.

Growth in unlikely places
Retail is supposed to be seasonal. Amazon has seen its top line dip by 24% sequentially in the first quarter in each of the past two years. However, if I point out that Amazon sold more in the March-ending quarter of 2007 than in the December-ending quarter of 2005, would it resonate with you? Yes, the periods are several quarters apart, but you'll be hard-pressed to find conventional retailers that can make a similar claim. Even smaller online retailers such as RedEnvelope (Nasdaq: REDE  ) , Bluefly (Nasdaq: BFLY  ) , and Overstock.com (Nasdaq: OSTK  ) , which are supposed to be nimbler, are unlikely to match that feat when they post their results in the coming days.

The secret sauce may be in Amazon's subscription services. Amazon Prime has been a big winner for the company, because it makes consumers more likely to count on Amazon throughout the year to fill their needs. Shoppers pay $79 a year for free two-day shipping on most Amazon items, so whether customers are ordering A Night at the Museum on DVD this week or the final Harry Potter book this summer, the company is creating brand loyalty. Pardon the gluttonous comparison, but it's a lot like going back for that second plate at a buffet or indulging in an all-you-can-eat entree promotion.

And since we're talking food, we may as well discuss Amazon's move into groceries. That move began this past summer, and it's another way that Amazon is starting to become an all-weather retailer.

The failure of Webvan should be fresh in your mind, but Amazon didn't simply load up on refrigerated trucks and begin delivering perishables on a daily basis. It stuck with bulk-sized sundry items that lack near-term expiration dates and can be transported effectively.

And just as Amazon Prime hooks shoppers throughout the company's 41 different store categories, Amazon knows how to hook grocery buyers online. It offers discounted prices on regularly replenished items. The most popular grocery products on subscription are diapers, cereal bars, and coffee.

No, Amazon will never have the smooth seasonality of Drugstore.com (Nasdaq: DSCM  ) , but it continues to find new ways to stay relevant throughout the year. Yet another example is its Unbox service, which allows digital delivery of movies and television shows into computers as well as TiVo (Nasdaq: TIVO  ) boxes.

Raising the bar
The future is looking bright for Amazon on many levels. The company is now looking to generate between $13.4 billion and $14 billion in net sales this year, a 25% to 31% improvement over 2006. The crystal ball is a bit murky after that. Operating income is expected to grow between 19% and 52% for the year.

Amazon doesn't provide net income guidance, though carrying out its $500 million share repurchase plan over the next two years could help hack away at its 430 million outstanding shares.

So give Amazon a little respect today. Let's just hope that the "I told you so" phase never bleeds into the "I grew too complacent" retail killer.

Amazon and TiVo have been recommended to Motley Fool Stock Advisor newsletter subscribers. You can learn more by taking a free, no-obligation trial for 30 days.

Longtime Fool contributor Rick Munarriz has been shopping online for about as long as Amazon.com has been in business, but he rarely has all the answers. He does own shares in TiVo. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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