Online retailer Amazon.com (NASDAQ:AMZN) took another step toward redemption yesterday with an upgrade in its debt. Standard & Poor's raised the bookseller's rating from B+ to BB-, which ultimately means that although Amazon's creditors aren't exactly staring at investment-grade paper, at least they're getting closer.
The timing of the upgrade is sweet on a few different levels. For starters, it provides a welcome contrast to the struggling bricks-and-mortar storefronts. U.S. retail sales dipped by 2.1% in August, the nation's worst showing in nearly three years.
The upgrade also gives Amazon another credential to wave in the face of cynics who figured that the company was a likely bankruptcy candidate a few years back, given its blue margins and red ink at the time.
In fact, Amazon is in much finer shape these days. This past quarter, the company's free cash flow rose by 37% on a 26% spike in sales. And today's Amazon isn't just profitable. It's profitable all year long, closing out its past 12 quarters in the black. It's also a global force these days, with 45% of its worldwide sales coming from outside the U.S.
Another great advantage of being deemed more creditworthy is that creditors are willing to concede lower borrowing rates in exchange for the perception that the loan is less risky. Then again, Amazon's been working on a better plan to achieve the same end: It's been paying off its debt.
Amazon now sports $1.5 billion in long-term debt, quite a bit less than the $2.3 billion on its balance sheet at the end of 2002. It bears noting that annualized sales have nearly doubled in that time, too.
This news should serve as a glowing case study for promising online retailers like Drugstore.com (NASDAQ:DSCM) and Overstock.com (NASDAQ:OSTK), which are battling critics as losses mount despite fantastic top-line growth spurts. Amazon was there once. Now its stock trades 179% higher than when it was singled out in the Motley Fool Stock Advisor newsletter service three years ago.
I'm guessing that Overstock investors wouldn't mind that kind of capital appreciation, especially those who picked up the shares recently after Overstock was recommended in the Motley Fool Rule Breakers ultimate-growth research service. Overstock shares are trading essentially flat with where they were when we selected the company in the November 2004 issue.
Amazon has made it. These days, companies such as Target (NYSE:TGT), Toys "R" Us, and Office Depot (NYSE:ODP) that have turned to Amazon.com to help them run their online stores. So take a bow, Jeff Bezos. You can breathe a little easier the next time that creditors come calling.
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Longtime Fool contributor Rick Munarriz has been a satisfied Amazon.com customer since the 1990s. However, he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
