Despite Bleak Outlook, Amazon.com Promises a Profit

SEATTLE – Way back in the dot-com craze, Amazon.com lived by the motto "get big fast."

These days, it's more like "save money fast."

The renegade company that reveled in its unorthodox approach once spared no expense to get customers what they wanted, even if it meant sending an employee to a corner book store in search of a rare title that wasn't available on its trademark Web site.

"Those are neat stories from a day when we were a much lower volume," said Jeff Wilke, chief of operations for the Internet retailer.

Now, the 6-year-old company acts more like, well, a company.

In the economically depressed days of late 2001, Amazon — one of the last-standing dot-coms — is more likely to tell stories about operating efficiencies, streamlining operations and smart inventory moves.

"It's hard to grow at 100 percent a year and get more efficient, but frankly, as you start to focus on efficiencies, you can really find a lot of money," says David Risher, a five-year veteran at Amazon who plans to leave the company in March.

While it is still committed to customer service, Wilke says the company is more focused on giving buyers a consistent experience.

Amazon has reason to sober up.

The Internet boom has definitely gone bust and the outlook for traditional retail sales isn't looking so hot, either.

Amazon is predicting lackluster sales in its all-important holiday season fourth quarter, and Wall Street is worried about the steep drop in revenue at is books, music and video store. That's Amazon's core business, and its only profitable sector.

Still, Amazon executives remain almost obsessively upbeat, convinced the company is in better shape than ever.

Company executives say Amazon is still on track to turn its first pro forma operating profit this quarter.

"If the economic environment hadn't gotten so bad we actually would have been well ahead of where we thought we would be," said Risher, who currently heads the company's Worldwide Applications Group.

Pro forma operating profitability excludes costs such as stock options, losses from investments and restructuring charges, and it's a far cry from true profitability. For example, Amazon had a net loss of $170 million in the third quarter of this year, while its pro forma operating loss was just $27 million.

But analysts say hitting that goal could make or break Amazon.com.

"That's what investors are looking for, and I think that they have to hit that, especially given the amount of focus and attention they've given to it," says Jeetil Patel, an analyst with Deutsche Banc Alex. Brown.

Patel is convinced Amazon will meet its goal, and praises the company for its cost-saving measures.

But other industry watchers are less optimistic — and the company's roller-coaster stock performance shows Wall Street is growing impatient.

Shares in Amazon dropped more than 20 percent last month after Amazon said revenue would be flat or grow by at most 10 percent in the fourth quarter, the most important sales period for retailers. Shares have since rebounded somewhat but have still plunged by about 70 percent in the past year.

More worrying to analysts, in the third quarter the company saw a 12.1 percent drop in books, music and video sales, compared to last year. Based on revenue comparisons, Prudential analyst Mark Rowen believes Amazon lost significant market share to rival Barnes & Noble.com in that quarter. That's a worrying trend, if Amazon can't abate it.

Risher says the company is confident it will rebound from the drop, which he attributes in part to increased sales in the company's used-books section. The company has taken steps, such as price cuts and improved features, to bring business back, he says.

"I don't at all want to sound complacent," Risher says, "(but) certainly in the long-term, absolutely, we're not anywhere close to saturation."

Operating costs are down 20 percent, Amazon Chief Executive Jeff Bezos boasted last month.

Much of that cost-saving has come as Amazon has become better at predicting what inventory it needs to buy and store, and started farming out the costly warehousing task whenever possible.

Now, the company is taking that to the next level. In the past nine months, the company has struck deals to provide the Web retail capabilities for established companies like Target, Borders and Toys 'R' Us.

Such deals take advantage of Amazon's clear strength — its Internet sales and payment technology, and its strong customer base — while eliminating the costly work of maintaining inventory and shipping products.

"We want to be the place where you come and buy anything online," Risher says. "The thing that's changed over the past couple years is that we've realized, basically, we'd be much better of if we start to do that in partnership with others rather than by ourselves."

But Amazon has not yet said when it will make a true profit, and both Wilke and Risher predict it will take a while before these deals turn into significant revenue for Amazon.

Meanwhile, some remnants from the old Amazon.com remain. As the company gears up for its busiest months of the year, normally desk-bound employees are again scheduled to trek out to its remote production facilities and pack boxes on the assembly line.

But that tradition, too, has become more business-like. While Risher says the distribution facilities definitely need the "arms and legs and leadership" of the company's white-collar workers, managers are also encouraged to keep an eye out for cost-saving measures.

"It is one thing to sit in an office and draw up plans and spreadsheets," Risher says. "It's quite another to Cambellsville, Kentucky and Fernley, Nevada ... and get that visceral sense of how the whole operation goes."