The weak U.S. economy did not prevent Amazon.com Inc. from registering 31% North American sales growth in the first quarter over the same period a year ago. The company may benefit from the weaker economy as more consumers turn to Amazon seeking low prices, analysts say. But they worry that profits could be squeezed for Amazon—and by extension all online retailers—by stiffer price competition as retailers compete to woo financially squeezed consumers.
In the first quarter Amazon, No. 1 in the Internet Retailer Top 500 Guide, reported worldwide net sales increased 37% to $4.13 billion from $3.02 billion in Q1 2007, although that increase was only 31% after accounting for the favorable impact of the falling U.S. dollar. Sales from Amazon’s U.S. and Canadian web sites were up 31% to $2.13 billion, and international sales were up 44% to $2.01 billion, but 31% after adjusting for currency swings.
“Our sales growth this quarter was driven by low prices and millions of in-stock items available for immediate shipment,” says Jeff Bezos, CEO and founder of Amazon.
Financial analysts repeatedly asked Bezos and chief financial officer Thomas J. Szkutak to comment during a conference call yesterday on the impact of the weaker U.S. economy on Amazon, but received bland responses. “We don’t have a lot of data points around the economy, so it’s difficult to say what’s going on there,” Szkutak said, according to a transcript provided by Seeking Alpha, www.seekingalpha.com. “We are seeing what we see within our business, which is some pretty good strength across categories.”
Amazon’s net income increased nearly 30% to $143 million from $111 million in the first quarter a year ago. But analysts noted a decrease of 30 basis points, or 0.3%, in gross margins. Szkutak said Amazon launched 16 new product categories last year in such areas as electronics, apparel and jewelry, and while offering competitive prices in those areas did not yet buy enough of these items to benefit from the most favorable discounts from suppliers.
A continuing shift away from Amazon’s core products of books, CDs and DVDs could further put pressure on profits, as could store-based retailers cutting prices to attract cash-strapped consumers, writes analyst Imran Khan of J.P. Morgan Securities Inc. in a note about Amazon’s results. “Potential pricing pressure from brick and mortar retailers, especially in a recessionary environment in the U.S., may force Amazon to compete more aggressively on price, impacting profitability,” Khan says.
The media category—books, CDs and DVDs—represented 62% of Amazon’s worldwide sales in the first quarter. Electronics and general merchandise represented 38% of sales, up from 31% a year ago, reflecting Amazon’s entry into new product categories.
Some analysts also raised their eyebrows over Amazon’s projection of full-year 2008 sales growth of between 29% and 35%, despite the 37% first quarter growth and projected growth of 34% to 41% in the second quarter. Citigroup analyst Mark Mahaney called the full-year projection conservative. But Domenic LaCava of investment firm Canaccord Adams called it “prudent in this type of consumer and retail environment.”
Overall, LaCava said Amazon’s first quarter results were impressive, noting that Amazon’s sales are growing at roughly twice industry estimates of current e-commerce growth. And he says Amazon seems well positioned to ride out an economic downturn.
“In a soft economy, before people stop spending altogether they’ll take the intermediate step and try to find the best prices,” LaCava says. “Amazon has proved itself as the centralized retail platform where people do comparison shopping and also buy there because they have the lowest price.”
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