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Originally published July 24, 2009 at 12:00 AM | Page modified July 24, 2009 at 11:00 AM

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Amazon profit drops on weaker sales, legal settlement

The 10 percent drop in second-quarter profit reported Thursday by Amazon.com indicates the recession has finally caught up to Internet retailer.

Seattle Times business reporter

Has the recession finally caught up to Amazon.com? Based on the 10 percent drop in second-quarter profit that the Internet retailer reported Thursday, the answer appears to be "yes."

"They didn't have the blowout numbers that we've seen from them in the past few quarters," said Dan Geiman, a retail analyst who covers Amazon for McAdams Wright Ragen in Seattle.

Shares of Amazon dropped more than $6 in after-hours trading Thursday to about $87.70, wiping out gains made earlier in the day when the stock hit a 52-week high. Shares had closed up $5.08, or 5.7 percent, to $93.87, before Amazon released its results.

The Seattle-based company said its second-quarter sales rose 14 percent from a year ago to $4.65 billion, slightly less than the $4.69 billion that Wall Street expected. Although that sales growth was better than the double-digit declines at many brick-and-mortar retailers, it's down from Amazon's average growth rate of 27 percent in the previous four quarters.

For the three months ending June 30, Amazon made a profit of $142 million, a 10 percent drop from $158 million a year ago. Its per-share profit of 32 cents, however, was a penny more than what Wall Street expected.

Geiman said several items in Thursday's report make drawing conclusions about the recession's impact on Amazon difficult. For one thing, the company's second-quarter profit was hurt by a $51 million legal settlement with former partner Toys R Us.

What's more, the company would have posted a 20 percent jump in second-quarter sales if not for unfavorable foreign-exchange rates, and it faced a tough comparison in the year-ago period, when it benefited from a surge in online shopping as gas topped $4 a gallon.

"There are a lot of things covering up what would otherwise be better numbers," Geiman said. "But all things equal, things have slowed down."

Sales for Amazon's U.S. and Canadian Web sites rose 13 percent from a year ago, compared with a 16 percent increase for its international segment.

Although North American sales of electronics and other general merchandise increased 29 percent from a year ago, Amazon's media business stalled at $1.1 billion.

Robust book sales were offset by a decline in sales of video games and consoles, Chief Financial Officer Tom Szkutak said. He noted that in the prior year, three of the four most popular video games were released during the second quarter, including Nintendo's Wii Fit.

Amazon said sales of its Kindle electronic reading device continued to exceed expectations, though the company did not provide specifics.

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It released its results after announcing plans Wednesday to buy privately held shoe vendor Zappos.com for more than $850 million in stock. Szkutak said Zappos last year had sales of $635 million and a small profit. Otherwise, he revealed few new details about the deal.

"We're looking to learn from each other," he said. "But this is not about synergies. This is about growing in categories that we think are very interesting."

Looking ahead, Amazon expects its third-quarter sales to range between $4.75 billion and $5.25 billion, which would be 11 percent to 23 percent above the same period last year. It predicts operating income of $120 million to $210 million, or anywhere from a 22 percent decline to 36 percent increase.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

Copyright © 2009 The Seattle Times Company

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