Amazon Net Soars 257 Percent on Potter’s Broomstick

Amazon.com blew by Wall Street expectations Tuesday when it reported its second-quarter sales for 2007 were up 35 percent year-over-year.

Media sales grew 27 percent, no doubt boosted by 1.5-plus million Harry Potter and the Deathly Hallows prerelease orders made by the quarter ending June 30. However, growth in electronics and other general merchandise grew a whopping 55 percent.

Net sales increased 35 percent to US$2.89 billion in the second quarter, compared with $2.14 billion in second quarter of 2006. Excluding the $46 million favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, Amazon’s net sales grew 33 percent.

Net income was the big winner, though, which increased 257 percent to $78 million in the second quarter, or 19 cents per diluted share, compared with net income of $22 million, or 5 cents per diluted share in second quarter 2006.

Amazon Prime a Key Factor?

“Our strong revenue growth this quarter was fueled by low prices and the added convenience of Amazon Prime,” said Jeff Bezos, founder and CEO of Amazon. “More and more customers are taking advantage of Amazon Prime, and we’re pleased with the acceleration in subscriber growth this quarter.”

First introduced in February of 2005, Amazon Prime is a membership program that gives members free two-day shipping and next-day shipping for $3.99 — in addition to a flat membership fee of $79 per year. Not all products sold through Amazon Prime qualify for the free and fast shipping, and analyst have criticized the program in the past, believing it wasn’t cost-effective.

Amazon surprised many analysts with its strong sales performance in the U.S. and Canada, where the company posted 38 percent gains on $1.6 billion in sales.

Challenges Ahead?

With Amazon.com’s recent successes, will the third and fourth quarter of this year bring similar gains?

“Their biggest challenge is moving the growth drivers that are working in the U.S. into international markets,” Steve Weinstein, a senior research analyst and vice president of interactive commerce and media for Pacific Crest, told the E-Commerce Times.

“No reason they shouldn’t work, but it is always about execution,” he added.

Amazon raised its third quarter 2007 guidance, and expects net sales to break $3 billion, growing 30-plus percent over the third quarter of last year. For fiscal year 2007, Amazon now expects net sales to break $13.8 billion and grow more than 29 percent compared to 2006.

Money on the Table

“To put it simply, nothing invites competition like success,” David Garrity, director of research for the Dinosaur Group, told the E-Commerce Times. Dinosaur Group’s most recent pre-Q2 2007 Amazon forecast predicted favorable second quarter results, as well as included a “buy” recommendation on a price target of $85 per share — this on July 20. Amazon’s stock price closed Wednesday at $86 and change.

“How is this push into a fuller line of product offerings going to invite competition from other retailers? Because, trust me, nobody is going to sit back and let someone else come in and walk off with close to a billion dollars in revenue on a quarterly basis and not mount some sort of challenge,” he explained. “The people to look at here are not necessarily other online retailers but traditional retailers that are well-represented in terms of the online channel.”

Garrity said Amazon may face interesting competition if a retailer like Wal-Mart decides to beat Amazon on price and leverage its larger distribution infrastructure in a way that’s more favorable to consumers.

The next big question is how much of Amazon’s North American growth was due to “Harry Potter” and how much was due to expanded product lines?

“What’s interesting in Amazon’s discussion is, nowhere do they disclose just how many Amazon Prime subscribers they have,” Garrity noted. “So, how much is it really Amazon Prime in the second quarter vs. add-on attachments to ‘Harry Potter’ pre-orders?”