Amazon profits hurt by investment drive

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Online shopping giant Amazon said it is to take on 1,000 new staff after it revealed a shock 73 per cent fall in profits.

The jobs, which will include both permanent and temporary staff, will be for a new fulfilment centre in Hertfordshire, which will be open for Christmas 2012.

The new centre forms part of a heavy investment programme by the world’s largest online retailer, which has recently unveiled a new tablet version of its Kindle electronic reader to rival Apple’s iPad.

But the investment drive hit its latest quarter, as group earnings fell by 73 per cent to £39m in the three months to September – despite a 44 per cent surge in global sales to £6.8bn.

Amazon shares plunged 12 per cent overnight in the US as analysts said the figures were well below expectations with sentiment also hit by its forecast of a possible £125m loss in the current quarter due to write-offs and one-off charges.

The firm added group net sales growth in the three months to December would also slow to between 27 per cent to 44 per cent, compared with 51 per cent a year ago.

Chief executive Jeff Bezos said pre-orders for the new Kindle Fire tablets have already forced it to increase capacity and build “millions more” than it originally planned.

The Kindle Fire goes on sale in the US in November 15, though there is no date yet for a release in the UK.

Mr Bezos added that orders for new, upgraded versions of the original Kindle were also double the previous launch. A new, lighter version is on sale in the UK for £89.

Sales of Kindles incorporating 3G and wi-fi were Amazon’s best UK seller over the past three months, with romantic novel One Day by David Nicholls the best selling book.

An electronic version of One Day also featured in the top ten sellers alongside That Summer in Ischia by Penny Feeny and Cold Kill by Neil White. Fifa 2012 was the best-selling video game.

Amazon added that is it is now selling three eBooks to every one hard cover version, up from a ratio of two-to-one previously.

International sales, which include the UK as well as Germany, Japan, France, China, Spain and Italy, increased by 44 per cent in the third quarter to £3.1bn.

Analysts raised concerns that Amazon is losing some of the revenue momentum that had helped investors overlook its razor-thin profit margins.

“We’re not seeing the investment pay off yet, but I think investors are impatient as to how long will it take before you will start to see this pay off,” said Evercore Partners analyst Ken Sena. “When are we going to start to see some signs?”

Amazon’s fourth-quarter forecast implies a profit margin of “effectively zero,” Youssef Squali, an analyst at Jefferies & Co said.

Fred Moran, an analyst at The Benchmark Co, said: “Lower profit margins would be acceptable, but for the lower-than-expected revenue growth numbers.”

Mr Moran had expected third-quarter revenue growth of as much as 50 per cent.

The company unveiled its new Kindle Fire tablet in late September and many analysts think it is being sold close to the cost of making it, or even at a loss.

Scot Wingo, chief executive of ChannelAdvisor, a software company that helps merchants increase online sales, said: “The revenue is a little light, but margin is where the biggest variance is from Wall Street’s expectations. This is largely due to Amazon’s investment in the Kindle Fire.”

Amazon’s chief financial officer Tom Szkutak said that the company has had to add fulfilment capacity to handle the growth of its main online retail business. He said Amazon is increasing production of the Kindle Fire by “a few million units”.

Analysts feeling nervous

Amazon is investing in video content and other publishing deals to support its new Kindle Fire tablet, while also spending on datacenters for its cloud computing business and fulfilment for its online retail operations.

Wall Street has accepted such spending because Amazon has proved in the past that it can generate higher growth from such investments. However, analysts have been on edge about Amazon’s third-quarter results and fourth-quarter forecasts because of the recent increase in expenditures.

Amazon’s chief financial officer Tom Szkutak said the company is planning to build 17 new fulfilment centres this year, two more than its previous plan.