A gaudy 20 percent increase in net sales for the first quarter of 2006 was offset by Amazon’s early adoption of stock-based compensation expense accounting, which hit net income hard.
Amazon (AMZN) sales moved to $2.28 billion for the first quarter of 2006, compared with $1.9 billion in the same period in 2005.
Employee stock expenses gave investors heartburn as net income only reached $51 million under the new accounting rules adopted by Amazon. Free cash flow, used by some investors to judge a company’s strength, grew 20% to $501 million for the trailing twelve months, compared with $417 million for the trailing twelve months ended March 31, 2005.
The company cited its Amazon Prime program as a strength. It debuted in February 2005, and offers unlimited 2-day shipping with no minimum order in exchange for a $79 membership fee:
“We’re pleased to see strong quarter-to-quarter sequential growth for new Amazon Prime subscriptions,” said Jeff Bezos, founder and CEO of Amazon.com. “This sequential growth comes off our biggest holiday season ever, and one where new subscriptions to Amazon Prime more than doubled from November to December.”
Among its highlights, Amazon noted the implementation of click-to-call functionality for its US, UK, German, and French websites. That allows visitors to quickly reach a customer service rep for assistance.
Unfavorable currency exchange rates hurt Amazon’s international business. Although sales from the U.K., German, Japanese, French and Chinese sites were $1.03 billion, gaining 18 percent from the same period in 2005, results without that impact would have delivered a 20 percent increase instead.
Amazon also addressed the legal battle it is facing against Toys ‘R’ Us, which could ultimately push down its operating profit in 2006:
We are appealing a recent court decision that terminates our Toysrus.com contract and are seeking a stay of the termination pending a decision on our appeal….If we do not prevail, operating profit could be negatively impacted by as much as $50 million for the year, including by as much as $25 million for the second quarter.
A judge in New Jersey ruled in favor of Toys ‘R’ Us in March. She found Amazon at fault for promising Toys exclusive rights to be Amazon’s toyseller, then finding and placing other toy retailers on its side, frequently next to Toys’ listings.
Amazon claimed Toys’ inability to keep hot items in stock as agreed damaged Amazon’s sales during the 2003 holiday season. A lawsuit from Amazon followed, along with Amazon finding additional toy retailers to partner with for the site.
Although Amazon wants to continue to offer toys from its site, it will have to compete with Toys ‘R’ Us and with Wal-Mart, which is the top toy retailer ahead of Toys ‘R’ Us. That may prove troublesome when the 2006 holiday shopping season begins for Amazon.
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David Utter is a staff writer for Murdok covering technology and business.
