Amazon profit margins squeezed

By Alexandria Sage

LOS ANGELES (Reuters) - Amazon.com Inc posted a decline in profit margins on Wednesday as the impact of its discounting overshadowed quarterly earnings and a sales forecast that topped Wall Street targets.

Shares of the Internet retailer, which trade at a huge premium to peers, fell more than 6 percent.

The fourth-quarter gross profit margin fell to 20.6 percent from 21.3 percent a year earlier and 23.4 percent in the third quarter.

"That was disappointing," said Hamed Khorsand of BWS Financial. "It seems there was a lot of promotions, discounting in the quarter." The operating income outlook "doesn't look too great," he added.

Fears of pared-back spending by U.S. consumers has unnerved investors in consumer companies, but Chief Financial Officer Tom Szkutak said, "Our business is fine," when pressed by reporters on a conference call about how Amazon would fare.

"What we think going forward is reflected in our guidance," he said.

Asked whether Amazon had cut prices to the detriment of profit margins, Szkutak said the company was continuously looking at pricing, and the fourth quarter was no different.

Net profit rose 112 percent to $207 million, or 48 cents per share, from $98 million, or 23 cents per share, a year ago. Sales rose 42 percent to $5.67 billion in the quarter.

Analysts, on average, had been expecting Seattle-based Amazon to post earnings of 47 cents per share on revenue of $5.36 billion, according to Reuters Estimates.

Operating income rose 38 percent to $271 million.

Amazon had been expecting quarterly net sales to range between $5.1 billion and $5.45 billion with operating income of $221 million to $291 million.

Amazon was one of the high-flying tech stocks in the latter half of 2007, but much of that gain was lost in a recent sector sell-off on recession fears and disappointing forecasts from Apple Inc, eBay Inc and Yahoo Inc. Wall Street concerns center on how Amazon, the most popular Web e-commerce site behind eBay, will fare in a recession.

The company gave first-quarter and full-year 2008 sales targets that were higher than Wall Street expectations.

For its first quarter, Amazon said it expects net sales to rise by 31 percent to 38 percent, to between $3.95 billion and $4.15 billion, with operating income of $155 million to $200 million.

Analysts, on average, have been expecting first-quarter net sales of $3.84 billion, according to Reuters Estimates.

Amazon predicts 2008 net sales of between $18.75 billion and $19.75 billion and operating income of $785 million to $985 million.

Wall Street, on average, has been expecting 2008 net sales of $18.1 billion, according to Reuters Estimates.

At Wednesday's close, shares of Amazon traded at 46 times 2008 earnings, well above the Amex Internet Index average of 19. Retail giant Wal-Mart Stores Inc and eBay, meanwhile, are valued at 14 and 16 times forward-looking estimated earnings, respectively.

Amazon shares fell to $69.55 in after-hours trade from a close of $74.21 on Nasdaq.

(Editing by Braden Reddall)