July 28, 2009, 12:00 AM

Zappos posted strong profits in 2008

With Zappos, Amazon is acquiring a profitable company that managed a healthy increase in 2008 net sales, according to a new Amazon filing with the U.S. Securities and Exchange Commission. Zappos’ net sales rose 20.5% in 2008 while net income grew 500%.

Katie Evans

Managing Editor, International Research

With Zappos.com, Amazon.com Inc. is acquiring a profitable company that managed a healthy increase in 2008 net sales, according to Amazon’s newly filed S4 registration statement with the U.S. Securities and Exchange Commission. Amazon announced a tentative deal last Wednesday to acquire Zappos for $847 million.

The filing, which provides details on Zappos’ financial performance and balance sheet, reveals that Zappos, No. 27 in the Internet Retailer Top 500 Guide, posted net sales of $635 million in 2008, an increase of 20.5% from net sales of $526.8 million in 2007. The S4 filing also reveals that Zappos posted net income of $10.8 million last year, an increase of 500% from net income of $1.8 million in the prior year.

Overall Zappos spent more on marketing, product development, and general and administrative expenses last year. The online shoe and accessories retailer increased its operations spending 25.7% to $201.6 million in 2008 from $160.4 million in 2007. Zappos spent $153.3 million on sales, marketing and fulfillment last year, or 24% of net sales, and $25.2 million-4% of net sales-on product development. The e-retailer spent 3.9% of net sales, or $23 million, on general and administrative expenses.

In the first quarter ended March 31, Zappos posted net sales of $143.9 million, up 8.4% from $132.7 million in the first quarter of 2008. For the same quarter Zappos had net income of $221,000 versus $594,000 in the prior year. In Q1, Zappos spent 24.2% of net sales, or $34.8 million, on sales, marketing and fulfillment, and 4% of net sales-$5.7 million-on product development. Spending in the first quarter on general and administrative expenses totaled $5.2 million, or 3.6% of net sales.

Zappos spent considerably more on advertising last year, according to the S4 filing. In 2008 Zappos reported spending $72.4 million on various forms of traditional and online advertising, up 37.9% from $52.5 million in 2007. Zappos, which operates a pair of fulfillment centers in Nevada and Kentucky, also will pay $5.3 million in operating leases for fulfillment centers, office space, retail stores and computer equipment in 2009 and $4.2 million in 2010.

Zappos reported gross merchandise sales of $1.014 billion in 2008, according to the Internet Retailer Top 500 Guide, and its net sales of $635 million suggest more than a third of that merchandise was returned. Zappos is among the few online retailers to pay for return shipping, and it appears many of its customers take advantage of that offer.

Amazon will acquire all of the outstanding shares of Zappos for approximately 10 million shares of Amazon common stock valued at $807 million and $40 million in cash and restricted stock to Zappos employees. The deal is expected to close this fall. Under the tentative agreement to acquire Zappos, Amazon also will assume Zappos’ debts of $52 million.

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