Amazon Prepares to Meet Wall Street's Tall Order

Amazon has already tipped its hand a bit when it comes to earnings by calling this past holiday shopping season its "best ever, and now the question remains, is that good enough to beat the Street's expectations, and raise guidance from here forward?

Amazon will release its fourth quarter earnings after the bell Thursday, with analysts expecting 39 cents a share on $6.44 billion in revenue. ComScore reports that online retail sales dropped 3 percent to $25.54 billion from Nov. 1 to Dec. 23, and 4 percent through the entire fourth quarter. But Amazon itself says orders jumped 17 percent to more than 6.3 million items on Dec. 15, its single busiest day. The company has already forecast a fourth quarter revenue range of $6 billion to $7 billion.

The company's news will follow disappointing earnings from eBay last week, but stronger than expected results from both Google and Yahoo . With better than 50 percent of eBay's sales now coming from fixed-priced transactions (clicking the company's Buy It Now feature rather than going through an auction), the thinking on Wall Street is that eBay is struggling to compete with the Amazon model, rather than watching Amazon emphasize auctions to try to compete with the eBay model.

So now the two are locked in a pitched battle for online retailing dominance and it looks as though Amazon is enjoying the upper hand, at least so far. Citigroup's Mark Mahaney predicts a miss-and-lower Q4 report despite suggestions of strength during the quarter. Based on his checks, he says, there's a reasonable downside risk to Street estimates. Sales might be climbing, he says, but at what cost? Free shipping? Severe discounting? He says there's a strong likelihood that Amazon's gross margins and net income will feel the pressure.

Piper's Gene Munster cites "consumer spending headwinds" that will continue to pressure growth and margins, rating the stock a "neutral" with a $45 target. Jefferies' Youssef Squali echoes the concerns, with limited visibility into margin expansion because of the steep discounting.

Citi's Mark Mahaney offers up a very useful "cheat sheet," and here are some highlights: Pro forma operating income expected to be about $330 million, though anything less than $300 million would be negative; operating margin of about 5.1 percent (Citi expects 4.7 percent); North American revenue growth of 13 percent, better than 15 percent good, but under 12 percent bad; North American gross margin of 22.3 percent; International revenue growth of 6 percent; International gross margin of 18.5 percent; and a Third Party mix percentage of 25 percent to 30 percent.

As far as guidance is concerned, the Street is looking for operating income of $261 million on $4.598 billion and for the entire year 2009, operating income of $1.2 billion on $21.3 billion.

Analysts will also be looking for some commentary on the company's Kindle electronic book reader. The company sorely underestimated the popularity of the device heading into the holiday shopping season, announcing a 3 to 4 month back-order delay after Oprah Winfrey featured the Kindle, and Amazon CEO Jeff Bezos, on her show, calling it the best device she's ever seen. As Amazon seeks to replenish the supply chain with the $399 device, there's rumors that the company will upgrade and update the device with a newer version as soon as next month, and that part of the product shortfall came from Amazon trying to clear the channel. It's just that the channel cleared a lot sooner than anyone anticipated.

Amazon has scheduled a significant media event in New York City on February 9 and there's speculation that it might center on the new and improved Kindle.

Meantime, Amazon shares dropped 30 percent during the quarter and 45 percent during 2008.

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