Discounting hits Amazon profits

ONLINE retailer Amazon.com's discount and free shipping programmes, which have driven its growth over the past 12 months, took their toll on first-quarter earnings with net profit for the first quarter falling from $111m (£58.7m) last year to $78m (£48m) this time.

The company said there was little chance of a turnaround in the second quarter when operating income could drop more than 40%. But Amazon said it would stick with its strategy of discounts and free shipping which have helped sales surge.

Even in the current quarter, revenue rose 24% to $1.9bn from $1.53bn this time last year, although that has been also helped by a weak US dollar boosting the value of foreign sales. When the currency effect is stripped out, net sales rose 22%.

Amazon's result was also hammered by a $56m tax charge for repatriating assets, although that move is aimed at lowering future tax costs.

With shares in the company falling 4% in after-hours trade, Amazon shook off the concern that revenue growth may be coming at the expense of profit. 'Our objective remains offering low prices every day and applying them broadly across our entire product range rather than discounting a small number of products for a limited period of time,' Amazon chief financial officer Tom Szkutak said.

Jeff Bezos, Amazon's chief executive, said that the company would continue its strategy of creating and hosting online stores for other retailers which took part in the scheme during the quarter. 'We are able to use the platform we've been investing in for years to service their needs,' Bezos said.

Although not part of the original business plan, Amazon now gets 27% of its sales from third parties, up from 23% last time. The company said its net shipping loss rose 29% to $55m due primarily to free shipping and Amazon Prime, its recently launched programme that provides unlimited two-day shipping for an annual fee of $79.

The company also boosted technology spending and invested in areas such as its A9.com search engine, web services and more development centres. Amazon said it plans to keep increasing spending over the coming year.

'We anticipate continuing to hire computer scientists and software engineers throughout 2005 to invest in further innovation for customers,' Szkutak said.

For the second quarter, the company forecast revenue of between $1.68bn and $1.83bn. But it expects operating income to drop as much as 42% to between $50m and $80m.