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Amazon may catch case of holiday blues

 
Published Oct. 25, 2014

NEW YORK — It might be a blue Christmas for Amazon.

The world's largest online retailer gave a disappointing forecast for the crucial holiday quarter on Thursday while also reporting a wider loss than analysts expected for the third quarter.

The financial results could end investors' patience with Amazon's slim profit and its strategy of investing heavily in new products and services to spur revenue growth. The stock price tumbled 11 percent in after-market trading Thursday and then lost 8.3 percent Friday to close at $287.06. Before the results were announced, Amazon's stock had already lost 22 percent this year.

Amazon has long focused on spending the money it makes to grow and expand into new areas. It launched a smartphone, the Fire, this year, and has been offering a set-top video streaming device, a streaming video service and several tablets and e-book readers.

The company has also been investing in services for its $99-a-year loyalty program, Prime. It has added a grocery delivery service and music streaming for Prime members, as well as offering original TV shows such as the critically acclaimed Transparent starring Jeffrey Tambor.

But it is increasingly clear that what investors want more than revenue growth is a solid profit.

"The market was looking for more in terms of revenue and operating income and the fourth-quarter outlook," said Morningstar analyst R.J. Hottovy. "It's going to be a competitive landscape for retailers this holiday season, and retailers will compete aggressively for consumers."

In a conference call with analysts, chief financial officer Thomas Szkutak defended its strategy and said the company is focused on "using its capital wisely so that over time we get good returns on invested capital."

But he agreed that the company needed to be "selective" on new projects after years of a seemingly endless array of ventures.

Amazon said it expects holiday quarter revenue of $27.3 billion to $30.3 billion, below analyst expectations of $30.9 billion. That's an increase of 7 percent to 18 percent — slower growth than the prior-year holiday quarter, when sales rose 20 percent.

The holiday period is crucial because retailers make a chunk of their annual profit, about 20 percent, in November and December. Overall, the National Retail Federation expects sales during the period to be up 4 percent to $617 billion.

Amazon CEO Jeff Bezos said the company was focused on making the holidays "easier and more stress-free" than ever. The company has hired 80,000 seasonal workers and has expanded its Sunday shipping service. It now has more than 50 distribution centers in the United States, up from 40 last year. And in July, it announced it was opening eight smaller sorting centers for a total of 15 by the end of the year.

Speed of shipping is going to be a key for any retailer this holiday season, Hottovy said.

Amazon offers free two-day shipping on many products through the $99-a-year Prime membership. But competition is heating up: Target said Tuesday that it would offer free shipping on all items this holiday season.

"Last year, retailers figured out price matching wasn't enough," Hottovy said. "You have to get products to consumers quickly and cheaply as well."