Those who had hoped Amazon.com could completely avoid the problems plaguing other retailers got a reality check on July 23, when the company missed Wall Street forecasts for sales and posted its first year-over-year profit decline in two years.
The Seattle retailer posted net income of $142 million in the second quarter, a 10 percent drop from the same period in 2008 and the first such decline since December 2006. Sales improved 14 percent, to $4.65 billion, but narrowly missed Wall Street’s expectation of $4.7 billion.
Thrown Off by Toys “R” Us Settlement
Amazon’s stock, which has surged more than 80 percent since the beginning of the year, fell 6.6 percent in after-hours trading, to 93.87. “Any time you’ve had a stock at this high a valuation, you expect to see everything right,” says Broadpoint AmTech analyst Ben Schachter.
In a call with analysts, Chief Financial Officer Thomas Szkutak said the profit decline was due to a $52 million settlement the company paid in June to resolve a dispute with Toys “R” Us. The retailer had claimed Amazon violated a partnership by neglecting to keep its products in stock and allowing other toymakers to sell on the site. Without the payment, Amazon’s profits would have increased. “It was a good quarter but not a great one, and the huge legal settlement to Toys ‘R’ Us really made a big difference,” says Gene Munster of Piper Jaffray.
Amazon has weathered the financial crisis better than most retailers. With the drop in housing prices and stocks, consumers have cut back on their spending on a wide variety of products. Several prominent traditional retailers have filed for bankruptcy protection, including Circuit City, Sharper Image, KB Toys, and Linens ‘N Things. The National Retail Federation expects total retail sales this year to shrink by 0.5 percent, to $2.27 trillion,…