SAN FRANCISCO  —  Amazon.com Inc. (AMZN) on Wednesday posted a quarterly profit that missed Wall Street estimates and it unveiled a costly new shipping program that heightened concern about falling margins, sending its shares tumbling 14 percent.

Fourth-quarter net earnings more than quadrupled as a weak dollar boosted record holiday sales and the company recorded a $244 million tax benefit. But incentives like free shipping and discounts cut into profits and hurt margins.

"Margins are well below expectations — revenues were good, but margins are a disaster," said Chris Baggini, manager of the Gartmore Growth Fund (search).

"Product mix was not in their favor. Price competition crushed their margins," said Baggini, whose fund does not own Amazon (search) shares. "They had to offer a lot more free delivery product to move the sale."

Net income during the quarter, which includes the critical holiday season, rose to $346.7 million, or 82 cents per share, from $73.2 million, or 17 cents per share, a year ago.

But stripping out the benefit from a $244 million tax asset, the company said net income excluding items would have been 35 cents a share. On that basis, Wall Street analysts were expecting the company to post a profit of 40 cents a share.

Sales rose 31 percent to $2.54 billion as lower prices and free shipping attracted customers during the critical holiday season. Excluding the benefits from changes in foreign exchange rates, sales rose 26 percent, the company said.

Sales in North America, the company's biggest market, rose 22 percent to $1.39 billion while international sales shot up 43 percent to $1.15 billion, helped by new offerings such as a DVD rental service in Britain.

But Janco Partners (search) analyst Martin Pyykkonen said Amazon's worsening profit margins "stuck out like a sore thumb. Gross margin fell to 23.1 percent from 23.9 percent due in part to lower prices and free shipping as part of the company's goal of attracting more customers and boosting overall profits.

"They're selling more stuff and making less profit margin on it," said Pyykkonen, who predicted customers would embrace Amazon Prime, a new program allows members to pay $79 annually for unlimited, express two-day free shipping with no minimum purchase requirement.

"It's great for the consumer, not for great for margins," Pyykkonen said.

The company also raised its 2005 sales outlook, but investors still sold Amazon stock in after-hours trading amid concerns over the cost of the new shipping program.

"Make no mistake about it, we expect Amazon Prime to be expensive for the company in the short term," Amazon Chief Financial Officer Tom Szkutak told reporters. "It is perhaps the most expensive thing we have done since free super-saver shipping.

"However, over the long term we believe that Amazon Prime will drive incremental demand just as super-saver shipping has done."

Amazon said it expects first-quarter sales to be between $1.80 billion and $1.95 billion. Analysts on average were expecting sales to hit $1.83 billion, in a range of $1.60 billion to $1.91 billion, according to Reuters Estimates.

For the full year 2005, the company raised its sales outlook to a range of $8.05 billion to $8.65 billion from an earlier estimate of $7.40 billion to $8.15 billion.

Amazon shares slumped to $35.80 in after-hours trading on the Inet electronic brokerage, down from their Nasdaq close of $41.88.