Weight of rising costs presses Amazon profit

In the saga that is Amazon.com's earnings, the second quarter was somewhat of a Hollywood blockbuster sequel:

Investors must wait to see how the story ends.

The online retail giant missed Wall Street's profit forecast for the quarter, turning in results of $22 million, or 5 cents per share — a 57.7 percent slide from a year ago.

The Seattle company's expenses grew as Amazon continued to invest heavily in technology and free-shipping promotions, while the collapse of its partnership with Toysrus.com cost the company $20 million in fees it would have otherwise collected.

Analysts polled by Thomson Financial had expected a 7-cents-per-share profit, and the 2-cents miss — announced after the markets closed — sent Amazon's stock tumbling 12 percent in after-hours trading to $29.50. The stock had slipped 72 cents to $33.59 in the regular session before the earnings release.

Amazon's sales were another story. They rose 22 percent to $2.14 billion, calming fears it had lost its competitive edge among increasingly sophisticated rivals.

The question is whether the company can continue to build momentum into the holiday-shopping quarter, when Amazon sees more than a third of its sales for the year.

Amazon Chief Financial Officer Tom Szkutak said the company would continue to lower prices across the board and invest heavily in the toy category for the rest of the year.

Those were among the factors spurring Amazon to lower its forecast for operating income for the year, in a range between $310 million and $440 million. That compares with a previous forecast of $390 million to $520 million.

Amazon opened new toy and baby stores July 5, days after its long-term Toysrus.com contract ended. Toys R Us won the right in February to sever the 10-year agreement after a protracted legal battle over terms of the original contract.

While Amazon has appealed the court's decision, the holiday quarter would be the first indication of whether it can go it alone in the toy business.

Amazon said it has already doubled its previous selection by working with manufacturers such as Fisher-Price and LeapFrog and distributors such as Target and eToys.

While Amazon has lost the power of the Toys R Us brand to lure shoppers, it hopes customers will be enticed by another powerful draw: free shipping.

The online retailer for the first time will extend its shipping promotions to shoppers who buy toys and baby products on its site, including its long-standing free-shipping offer on orders of $25 or more.

These promotions continue to be costly. Amazon reported a $60 million shipping loss, despite more than $128 million in shipping revenue.

Its outbound shipping costs accounted for 8.8 percent of total revenue.

Amazon said it would slow technology and content spending in the second half of the year, most notably in the final three months of fiscal 2006.

The company has spent $1.16 billion on technology and content in the past three years, prompting Wall Street to ask when it would see a significant return on that substantial investment.

Rumors have circulated for months that Amazon is developing a digital-movie service that would enable customers to download movies and TV shows, but the company has declined to comment.

For now, investors must decide whether they want their money tied up in the company.

David Garrity, research director for New York-based Dinosaur Securities, said the point at which Amazon becomes an attractive investment "seems to be receding, unfortunately, further into the future."

Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com