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Originally published July 22, 2010 at 7:41 PM | Page modified July 23, 2010 at 6:44 AM

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Retail Report

Amazon stock takes beating; profit misses expectations

Amazon.com posted a bigger second-quarter profit Thursday, but it fell short of Wall Street's expectations after spending more money on such things as Kindle TV ads and new distribution centers.

Seattle Times business reporters

Amazon.com posted a bigger second-quarter profit Thursday, but it fell short of Wall Street's expectations after spending more money on such things as Kindle TV ads and new distribution centers.

The Seattle-based Internet retailer's costs grew at virtually the same rate as its revenues — 40-some percent — and investors sent its stock on a 10.9 percent plunge in after-hours trading.

Amazon made a quarterly profit of $207 million, or 45 cents a share, up from $142 million, or 32 cents, a year ago. Analysts expected a per-share profit of 54 cents.

Amazon spent $6.3 billion to run its business during the quarter. It added 2,200 employees in three months, bringing its worldwide total to 28,300, and increased its marketing budget to $211 million, compared with $129 million in the second quarter of last year. Among its new marketing costs were TV ads for the Kindle e-reader.

Also, Amazon plans to add 13 order-fulfillment centers this year, said Chief Financial Officer Tom Szkutak, citing rapid sales growth.

That's "after keeping our fulfillment center infrastructure relatively flat last year," he told analysts in a conference call.

This week, the CFO at eBay told analysts it saw "a big slowdown" in sales in late May and throughout June, reflecting data showing that Americans pulled back on their spending starting in May. But Amazon's Szkutak declined to discuss the broader economy, saying Amazon is no bellwether.

"We focus very hard on expanding selection and making sure we have great prices," he said. "That's really what is driving growth."

Amazon's second-quarter sales rose 41 percent from a year ago to $6.6 billion, slightly better than the $6.5 billion that Wall Street expected.

Still, analysts were unimpressed.

"Normally, Amazon roars through the upper end of its guidance range," said Collin Gillis, who follows the company for BGC Financial in New York. "That didn't happen."

Gillis noted that Amazon's stock trades at roughly 30 times its projected 2011 per-share profit. "And when you pay that much for a share, you really expect mega-growth," he said.

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Weaker European currencies are another area of concern, because Amazon does nearly half of its business outside North America. Excluding changes in foreign-exchange rates, Amazon would have had year-over-year sales growth of 42 percent.

"This was a big negative quarter for them," Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco, told Bloomberg News. "Amazon has been a momentum stock."

Amazon's stock had taken a bit of a beating in the past three months, even before the sell-off late Thursday. Analysts worry about the Kindle's ability to compete with Apple's new iPad, which costs $499 and up and lets users read books, watch movies and check e-mail. Apple said it sold about 3.3 million iPads in the first three months.

Amazon got into an e-reader price war in late June, slashing the cost of a Kindle from $259 to $189 after Barnes & Noble cut the price of its Nook e-reader to $199. Sony then lowered the prices of its e-readers to between $149 and $299.

Amazon suggested Thursday it can benefit from the iPad's popularity as more shoppers use the tablet computer to make online purchases.

Amazon noted that in the past year, shoppers worldwide have ordered more than $1 billion from Amazon using a mobile device.

"The leading mobile commerce device today is the smartphone, but we're excited by the potential of the new category of wireless tablet computers," Chief Executive Jeff Bezos said in a statement. "Over time, tablet computers could become a meaningful additional driver for our business."

Earlier this week, Amazon said it sold more than three times as many Kindle books in the first half of 2010 as it did a year ago, and its customers now buy more Kindle books than hardcover books.

Analysts believe Amazon dominates the U.S. e-book market. Its Kindle store carries 630,000 books, plus 1.8 million free, out-of-copyright titles, which can be read on a range of devices, including laptops, mobile phones and the iPad.

But competition is heating up. This month, Borders Group launched its own electronic bookstore, setting a goal of capturing 17 percent of U.S. digital book sales within a year. Barnes & Noble recently said it secured 20 percent of the U.S. e-book market.

Lately, Amazon has been striking exclusive deals with publishers to make its Kindle store the only seller of some electronic books.

Thursday, Amazon said it signed an accord with the Wylie Agency to be the exclusive seller of electronic editions of 20 books, including Norman Mailer's "The Naked and the Dead" and Ralph Ellison's "Invisible Man."

During the quarter, Amazon also began selling the Kindle at Target stores and agreed to buy daily-deal website Woot for an undisclosed price, saying the Texas company would continue to be managed independently.

Looking ahead, Amazon projects third-quarter sales of between $6.9 billion and $7.6 billion, or year-over-year growth of 27 to 40 percent. Analysts expect quarterly sales of $7.1 billion.

— Amy Martinez

Tidbits

Broadway News, a locally owned newsstand in Seattle's Capitol Hill neighborhood, is closing at the end of this month. Owner John Hamel said the store's move three years ago to the north end of Broadway East ultimately did him in.

"There isn't enough traffic here to support a store like mine," said Hamel, who bought Broadway News eight years ago when it was several blocks south near East John Street.

Hamel said he'll now focus on selling a wide array of magazines at www.mymagstore.com. "I've been selling online for five years, and my online sales have surpassed my in-store sales," he said. — AM

The Neighborhood Farmers Market Alliance said the farms and businesses associated with its seven local farmers markets provide 680 full-time jobs and 920 seasonal full-time jobs, plus 238 jobs related to market-day operations.

The alliance itself has six full-time employees plus eight seasonal workers, according to Director Chris Curtis. — MA

After raising $5,000 in Walla Walla and $5,300 on Red Mountain in June, the nonprofit Auction of Washington Wines returns to Woodinville from Aug. 19-21 with auctions, dinners and a 10K and 5K run/walk.

Proceeds will benefit Seattle Children's hospital. — MA

The nonprofit PETA named Seattle the fifth most vegetarian- and vegan-friendly large city in North America. The top four were Washington, D.C.; Portland, Ore.; Albuquerque and Atlanta.

The ranking was based on the number of vegetarian and vegetarian-friendly restaurants per capita, as well as input from PETA staff and supporters on the quality of the options. — MA

Vovito Caffe & Gelato will open Sunday at The Bravern shopping center in Bellevue, which has been without a cafe for most of its first year in business.

It is a startup coffee shop by local entrepreneurs Ariff and Shairose Gulamani, and offers free Wi-Fi, seats 35 people and has a menu that includes 24 flavors of gelato and sorbetto. — MA

Retail Report appears Fridays. Amy Martinez covers goods, services and online retail. She can be reached at 206-464-2923 or amartinez@seattletimes.com. Melissa Allison covers the food and beverage industry. She can be reached at 206-464-3312 or mallison@seattletimes.com.

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Retail Report is a look at the trends, issues and people who makeup the dynamic and versatile retail sector throughout the Puget Sound region. Every Friday with Melissa Allison and Amy Martinez. Send tips or comments to mallison@seattletimes.com or amartinez@seattletimes.com.

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