UPDATE 3-Amazon.com profit margins squeezed, stock drops
(Recasts, adds quotes from conference call, analyst)
LOS ANGELES, Jan 30 (Reuters) - Amazon.com Inc (AMZN.O) posted a decline in profit margins on Wednesday as the cost of discounting overshadowed a robust rise in quarterly earnings and a bullish 2008 sales view above Wall Street targets.
Shares of the Internet retailer, which trade at a huge premium to peers, fell 11 percent on fears a potential recession could sap Amazon's earnings.
Margin contraction is a recurring worry among analysts who have watched the company spend on technology to attract new customers and discount shipping to keep buyers loyal.
But the fourth quarter was no exception to the worrying trend, with gross profit margin falling to 20.6 percent from 21.3 percent a year ago 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 forecast range, largely below Wall Street targets, "doesn't look too great," he added.
Global Crown Capital's Martin Pyykkonen said the company had implied its operating margins would be 5.5 percent to 6.2 percent in 2008, in line with the previous two years and compared with 5.7 percent in 2007.
Chief Financial Officer Tom Szkutak said double-digit operating margins were "possible" but added: "If a high single-digit operating margin is the right thing to drive free cash flow, that's what we'll do."
Fears of weaker U.S. consumer spending have unnerved investors in consumer companies, but pressed by reporters about how Amazon would fare, Szkutak said: "Our business is fine."
"What we think going forward is reflected in our guidance," he said on a conference call.
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.
Amazon's spending has chipped away at profit in recent years but a 2007 pull-back helped spark a rally in its shares last spring. Szkutak said its spending on technology and content will rise "somewhat less" in 2008 than revenue growth.
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. Continued...
