Amazon tumbles as earnings miss forecast

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Shares in Amazon lost 14 per cent in early trading after the online retailer announced fourth-quarter earnings that fell short of Wall Street expectations.

Jeff Bezos, chief executive, said profits were hit by lower selling prices, higher marketing and technology expenses, and increased awareness by customers of Amazon's free shipping offers.

The results stoked fears that Amazon would struggle to maintain its high rate of growth in the face of tougher competition from online rivals such as Overstock.com and eBay, as well as traditional retailers such as Target and Wal-Mart.

Although revenues surged by 31 per cent to $2.54bn in the three months to December at the high end of the company's guidance revenue growth was 26 per cent once the impact of foreign currency movements was stripped out.

Including a $244m one-off tax gain, net income was $347m, or 82 cents a share, up from $73m, or 17 cents in the same period of 2003.

But, excluding the tax benefit, “pro forma” earnings were $149m, or 35 cents. Analysts had been expecting 40 cents on this basis.

Marketing expenses increased by 45 per cent to $58m. Technology and content expenses were $72.8m, a 40 per cent increase.

“We see this as an important time to be investing. There are a lot of opportunities to go for,” said Mr Bezos.

In a further move to consolidate its status as the biggest online retailer, Amazon on Wednesday unveiled its first customer loyalty programme, offering unlimited two-day shipping for a flat annual fee of $79.

Amazon currently charges about $10 for two-day shipping, and offers free ground shipping on purchases of $25 or more.

In a note posted on Amazon.com, Mr Bezos said he expected the new Amazon Prime programme “to be expensive for Amazon.com in the short term”.

Later, in a conference call with investors, he noted that free and cut-priced shipping promotions cost the company $197m in 2004.

Amazon's efforts to diversify away from books, its original core business, is also hurting profit margins. Amazon said 74 per cent of revenues in 2004 came from sales of books, CDs and other media categories that, in general, command higher profit margins. Electronics and general merchandise accounted for 24 per cent.

For the first quarter of 2005, the company said it expected sales of $1.8bn to $1.95bn.

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