Amazon.com investors got a wake-up call yesterday when the world's biggest online retailer said its profit margins were sliding as it spends money on massive new distribution centres and acquisitions.
The company also reported slightly lower than expected sales for the fourth quarter, which includes Christmas, as it offered discounts and free shipping to attract customers.
The company posted a slight dip in operating profit for the Christmas fourth quarter as revenues rose 36%, signaling the high cost of keeping competitive in the highly promotional retail environment. Fourth-quarter operating margin declined to 3.7% from 5% a year earlier.
Amazon warned that in the current quarter it could drop to between 2.8-3.8% - well below its 5.5% of the first quarter of 2010.
Amazon disclosed last year that it was spending on 13 new distribution centres, and last night said that more would follow, without providing a number. Amazon's chief financial officer Tom Szkutak declined to comment on just how much investment in infrastructure, talent and acquisitions the company planned to make in 2011.
Amazon has enjoyed headlines and rapt admiration on Wall Street over the past year for its Kindle e-reader, the top selling such unit on the market, and its double-digit growth.
That buzz has sometimes overshadowed concerns about spending and Amazon's historic focus on driving revenue through expensive programmes such as free shipping, for example, at the expense of profit margins.
The company has also been on an acquisition spree, buying companies with built-in subscriber bases from Diapers.com to LOVEFilm, a UK-based DVD-by-mail and streaming video provider that operates in Europe.
Amazon said it expects first-quarter operating profit between $260-$385m, including $140m for stock-based compensation and asset amortisation. It expects revenue between $9.1 billion and $9.9 billion for the first quarter. Wall Street expects revenue of $9.31 billion.
Amazon, which began as a web bookseller and is now at the forefront of digital publishing, said Kindle books have now overtaken paperbacks as its most popular format. It said last summer it was selling more digital books than hardcovers.
Over 83% of books available in the US Kindle store are $9.99 or less, Amazon said. It has tried to keep prices low to encourage adoption.
Although Amazon does not disclose sales or profit data for its Kindle e-reader or content, many believe it derives more profit from digital books than from its Kindle devices and say that content is a better bet for its long-term growth.
For the company's fourth-quarter, revenue of $12.95 billion fell just short of the average estimate of $13.01 billion. Net income in the fourth quarter was $416m, or 91 cents per share,- up from $384m, or 85 cents per share, a year earlier.
