Bezos asks shareholders to forgive

There is no more fitting a word to describe the past year for the Internet’s top retailer, Inc., especially when that word comes from its illustrious founder and chief executive officer: “Ouch.”

In a letter to shareholders filed with the U.S. Securities and Exchange Commission Friday — a prologue to Amazon’s annual report for the year ended Dec. 31, 2000 — Amazon CEO Jeff Bezos mixed the typical financial facts with some serious grovelling.

More importantly, the filing recognized what analysts have been shouting at the market for the past year — the mistakes that have shelled the company and its stock since it brought its online bookstore public in 1997. The mistakes included failed investments in a number of partner online retailers including Inc. and Inc., both of which went out of business last year. With the closure this week of online convenience store Inc., a company fuelled in part by US$60 million from Amazon, the pain of those investments have only become more apparent.

“We made these investments because we knew we wouldn’t ourselves be entering these particular categories any time soon, and we believed passionately in the ‘land rush’ metaphor,” Bezos wrote. “Indeed, that metaphor was an extraordinarily useful decision aid for several years starting in 1994, but we now believe its usefulness largely faded away.

“In retrospect, we significantly underestimated how much time would be available to enter these categories,” he added.

Amazon is also seeing greater competition online from traditional retailers such as Wal-Mart Stores Inc., which have invested more resources into their Internet sites in the past year. Amazon itself is acknowledging that the company’s future market share is hard to predict. Bezos set a goal this year of reaching pro forma operating profit — excluding charges related to debt, investments, and one-time items — in the fourth quarter, but is not certain whether it will achieve that. “There can be no guarantees,” he noted.

As for its summary of the year past, released Friday, there was nothing new. The company announced its annual earnings on Jan. 30 reporting sales of US$2.76 billion, a 68 percent increase from 1999’s $1.64 billion in sales. Gross profit surged 125 percent to $656 million in 2000 from $291 million a year earlier. Pro forma net losses, which grew to $417 million for the year, shrank to 11 percent of sales for the year, from 21 percent a year earlier.

While the last week has offered some positive gains for Amazon’s (AMZN) stock, closing Thursday at $14.67, on four days of consecutive gains, its share price is down more than 80 percent from its high a year ago. And as the company’s sales continue to grow, much of its positive news is still overshadowed by its $2.3 billion in accumulated debt and a harsh investing environment.

“Nevertheless, by almost any measure, the company is in a stronger position now than at any time in its past,” Bezos claims in his letter.

Some financial matters are looking relatively better for Amazon. Contrary to recent furor regarding Amazon’s credit rating, fuelled by a harsh analyst report by former Lehman Brothers Inc. convertible bond analyst Ravi Suria, the company debt bonds this week were upgraded to “stable.” That was according to Moody’s Investors Service, a credit rating agency that raised Amazon’s debt position from “junk” to “stable” Wednesday.

But before Suria left Lehman in March to join Duquesne Capital Management LLC, his analysis sent enough fear into investors sending shares of its stock reeling more than 20 percent in June. Evidence that the company’s cash position couldn’t sustain its relationship with creditors through the end of the year touched investors who were already burdened by a declining e-commerce environment. Bezos, however, called his research “hogwash.”

Also this week, Amazon told Wall Street it expects first-quarter results to be better than previously expected when it reports earnings on April 24. Net loss, less debt and a number of one-time charges, is expected by the company to be $0.22 per share on revenue of US $695 million. Twenty-two analysts polled by First Call/Thomson Financial expected Amazon to report a loss of $0.30 per share on revenue of $669.6 million.

Dain Rauscher Corp. analyst George Sutton commended those numbers Monday, upgrading Amazon to “buy” from “neutral.”

“Strong numbers and a change in forward tone cause us to upgrade our rating. While our move to critic status on Amazon has been fun and frankly, easy, we knew at some point the flow of information, which has been decidedly negative, would change,” Sutton wrote.

And finally, the company announced this week that it would team with book selling giant Borders Group Inc. in a shared revenue partnership similar to its successful venture with Through the deal Amazon gains a grounded off-line partner and 350 retail stores to advertise in.

Sanford C. Bernstein & Co. LLC analyst Faye Landes, who covers Amazon closely, wrote in a research note Thursday that the bank viewed the deal as a “nice add-on to Amazon’s plateauing” businesses, which stumbled from about 50 percent growth in the first quarter of 2000 to an estimated 4 percent in the first quarter 2001, but is not “material.”

“So, if the company is better positioned today than it was a year ago, why is the stock price so much lower than it was a year ago?” Bezos wrote to shareholders.

His answer, quoting investor Benjamin Graham: “In the short term the stock market is a voting machine; in the long term, it’s a weighing machine.” Bezos argues that investors have been doing more voting than weighing.

Don’t expect a recount, just a whole lot more campaigning.