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Consumers keep on clicking
Stronger than expected 2Q results from Amazon is another good sign for e-commerce companies.
July 26, 2005: 6:32 PM EDT
By Paul R. La Monica, CNN/Money senior writer
Rising tide? Shares of Amazon have stumbled this year due to profit concerns but have recovered a bit recently.
Rising tide? Shares of Amazon have stumbled this year due to profit concerns but have recovered a bit recently.
Is Harry Potter dead?
Not the character -- the brand. With the world abuzz, one expert says the brand is overexposed. (Full story)

NEW YORK (CNN/Money) - News flash. People still buy stuff online. Apparently lots of it too.

A better than expected second-quarter earnings and sales report from online book king Amazon.com (Research) on Tuesday is the latest example of an e-commerce company delivering results that surpassed expectations. Shares shot up more than 10 percent in after-hours trading as a result.

Netflix (Research), an online DVD rental site, posted stronger than anticipated earnings on Monday and its stock surged 12 percent Tuesday. Last week, online auction company eBay (Research) posted better than forecast results and raised its guidance. Its shares soared nearly 20 percent on the news.

Amazon said sales grew more than 26 percent from the second quarter of last year and also raised its revenue targets for the third quarter and all of 2005 as well.

The company, which recently celebrated its 10th anniversary, expects sales to come in between $1.76 billion and $1.91 billion. The $1.835 billion midpoint of this range is higher than the $1.81 billion that analysts were expecting.

Results for the third quarter, which ends in August, will include sales Amazon.com generated from the latest Harry Potter book, which the company said was the biggest product release in the company's history. Amazon said it received more than 1.5 million pre-orders worldwide for "Harry Potter and the Half-Blood Prince."

For the full year, Amazon said it now forecasts sales to be in a range of $8.275 billion to $8.675 billion. The $8.475 billion midpoint is ahead of Wall Street's consensus estimate of $8.45 billion.

The strong results from Amazon and other retailers comes as a bit of a surprise. Heading into second-quarter earnings season though, online retailers were not expected to bask in the glow of Wall Street's affection. Amazon, among other e-commerce firms. issued first quarter results in April that were below Wall Street forecasts.

All the buzz among investors was about how online search companies Yahoo! (Research) and Google (Research) would report strong growth rates that was much better than the sales and profit increases for their online commerce brethren.

Well, it turned out that maybe expectations were a little too high for online advertising firms and a bit too low for online retailers. Yahoo! and Google both reported fantastic results but they failed to live up to the most bullish forecasts of some investors. Each stock slipped following their earnings release.

"These are strong results for Amazon. That's for sure. After some mild disappointments in the past that wasn't the case this time around," said Dan Geiman, an analyst with McAdams Wright Ragen.

Amazon's results were particularly well-received since the company lifted its operating profit forecast for the remainder of the year. The company said that it now expects operating profits for 2005 to be in a range of $415 to $515 million, up from its previous forecast of $395 million to $510 million.

The company has been criticized by some for a strategy of going after market share and sales at the expense of profits.

Amazon rolled out a new program called Amazon Prime, which gives consumers unlimited two-day shipping for a $79 annual fee, earlier this year.

It has also actively sought to keep prices low in order to attract consumers. For example, Amazon chief financial officer Thomas Skutzak said during a conference call with analysts that the company expected to break even from sales of Harry Potter books.

To that end, operating margins in the second quarter were 5.9 percent in the second quarter of this year, down from 6.2 percent a year ago. And based on guidance for the third quarter, operating margins would be between 3.4 percent and 4.7 percent.

Amazon founder and CEO Jeff Bezos acknowledged that the discounted shipping program will hurt profits in the short run in a written statement but hinted that this should lead to better results going forward.

"Though expensive for the company, Amazon Prime creates a premium experience for customers who join, and as a result we hope they'll purchase more from us in the long term," he said in the statement.

During the conference call, several analysts questioned Bezos and Skutzak about how much Amazon Prime would boost the company's profit margins in the long run.

The company would not give any specific guidance but Bezos did say that it was "fair to speculate" that it expected Amazon Prime users to buy more goods in more product categories going forward.

And Geiman said that the shipping costs will be one of the more important numbers for investors to keep an eye on going forward. Sooner or later, Amazon will need to show that the increased costs are worth it.

"Amazon does treat Amazon Prime as a marketing expense. It's a cost they are willing to incur to drive sales but it remains to be seen how much of an impact it will have on the future," said Geiman.

For a look at more Internet stocks, click here.

For more of CNN/Money's special coverage of earnings, click here.  Top of page

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