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Aggressive cost-cutting to the tune of 20% across the board saved Amazon.com (Nasdaq: AMZN) from an embarrassing third quarter. Key third-quarter facts:
- Sales were $639 million, flat with last year, down from the second quarter, and shy of the $650 million estimate.
- In the conference call, Amazon estimated that September 11 cost it $25 million to $35 million in sales.
- Books, music, and videos, the company's core business, saw sales drop 12% and gross profit fall 14%, although the division was still slightly profitable.
- Fourth-quarter guidance was lowered from 10% to 20% sales growth to 0% to 10% sales growth, meaning $970 million to $1.07 billion in Q4 sales, below the most recent estimate of $1.1 billion
- Amazon still expects pro forma profitability in the fourth quarter.
Pro forma profitability only matters to us because it's a step in the right direction -- a step toward true profitability. However, true profitability (meaning a net profit after taxes, depreciation, interest, etc.) will not likely be reached until the last quarter of 2002 at the earliest. Amazon's pro forma losses have marched downward, though, and we can take some comfort in this:
Quarterly Pro Forma Operating Loss
Q1 '00: $99 million
Q2 '00: $89
Q3 '00: $68
Q4 '00: $60
Q1 '01: $49
Q2 '01: $28
Q3' 01: $27
Q4 '01: ??
That fourth-quarter number better prove positive, but perhaps even more meaningful than that is Amazon's working capital situation -- because working capital continues to decline steadily, too. The company has about $250 million in working capital, while it used $64 million for operations in the last quarter.
In the fourth quarter, Amazon will receive a large influx of customer payments, so it'll be fine, but in January it'll need to pay its December bills, and so the first quarter -- and the next two seasonally slower quarters ï¿½ could prove tight.
The company can probably get through the first three quarters of 2002 without raising more funds to bolster working capital, but it might only scrape by at best.
There isn't much else of excitement to report. Amazon is in a position of defense, rather than offense, which is unfortunate. It is during difficult times like these that strong companies can gain ground on competitors by going on the offensive -- witness the ongoing spend-and-acquire strategy at Intel (Nasdaq: INTC) and eBay (Nasdaq: EBAY). Amazon, meanwhile, is just trying to keep its ship seaworthy during the storm.
At least cost-cutting is working admirably. You can view the numbers in the press release and see how in the first nine months of this year, Amazon chopped $20 million from its fulfillment costs even while growing sales; $20 more million was cut from marketing costs and Amazon still grew its customer base by 2.9 million in the third quarter alone; another $10 million was cut from technology and content costs, while the site only grew larger and new initiatives were launched earlier in the year.
The bottom line
The bottom line isn't much different from what we wrote in January, when we asked if we should sell the rest of our Amazon. (We sold a good chunk at about $34 for a 1,000% gain, leaving only profits in the stock, and we sold more at $14, leaving just a small position.) The bottom line is that Amazon is operating in a difficult business, its annual sales growth is now relatively lackluster, and it has more than $2 billion in debt.
At $15.50 per share in April, we wrote that the stock was still expensive and suggested that potential investors wait before buying -- use a wait-and-see approach. Make the company prove itself. There wasn't a rush to buy at that share price.
Now near $10, I feel the same. The company's approximate $5 billion enterprise value still appears generous for a retailer with $3 billion in annual sales that lacks strong sales growth and is far from net profits. (To its favor, Amazon is the conventional retailer online, and that's a promising long, long, long-term slot to own, but only if the company can consistently grow sales and net income year after year.)
I read all of the posts on the Amazon board since the earnings report (as of 9:00 p.m. Tuesday night) to see what people were saying, but -- no offense to the posters -- nobody but one (howardroark) had anything tangible to say. Maybe they just aren't interested in really talking about the company. Or maybe they don't see much to talk about.
I love Amazon's service, from its product recommendations to its customer service, and I think -- I hope -- that it'll be around and do okay for many years to come. It just isn't screaming out to me that it's a great investment. Not all the things that you love are.
Jeff Fischer never understood why so many people made fun of Rodney King's request, which was, "Can't we all just get along?" What's funny about that? View his profile to see which stocks he owns. The Motley Fool has a full disclosure policy.