Amazon Stock Falls on Rumors of Toys ‘R’ Us Unrest

Shares of Amazon.com (Nasdaq: AMZN) took a hit after word spread on Wall Street that Toys “R” Us (NYSE: TOY) may be seeking to renegotiate its partnership with the e-tail giant.

Speculation was sparked by published reports that Amazon CEO Jeff Bezos met with his Toys “R” us counterpart to discuss the status and structure of the nearly 2-year-old partnership.

Rumors were fueled by a Toysrus earnings report, released Thursday, which said Toysrus.com was responsible for US$76 million in operational losses last year despite sales growth of more than 50 percent.

“I can totally believe that Toys ‘R’ Us is not happy with their Amazon deal, because they are not the only partner to express displeasure with Amazon,” Morningstar.com analyst David Kathman told the E-Commerce Times.

Amazon shares fell more than 8 percent on Thursday and were down another 3 percent in early trading Friday, to $13.97.

Neither company responded to requests for comment on the status of the partnership, which has more than eight years left based on the original terms.

Bumpy Road

Kathman noted that Overstock.com pulled out of an Amazon electronics partnership after a short time, and he said travel site Expedia (Nasdaq: EXPE) has expressed disappointment about the amount of traffic it has received through an Amazon deal as well.

“I still think Amazon’s service business is important to its future, but that business isn’t a slam dunk and has some inherent limitations that Amazon needs to be aware of,” Kathman said.

Red Flags

Some analysts sounded even more shrill alarms, however. In a research note, Lehman Brothers said it is concerned that Amazon’s “services division is at risk,” and said the fact that Toys “R” Us posted such a large loss on its e-commerce operations was “a representation of retailers moving away from e-commerce.”

“If Amazon’s partners do not become profitable over time from their online initiatives, many of them will exit the online business completely,” the Lehman note said.

Model Citizen

The Toysrus.com partnership has long been held up as a model by Amazon and industry observers.

Forged in August 2000, after Toysrus.com endured a rough start as a stand-alone Web site, the 10-year deal handed over order taking, fulfillment and customer service to Amazon while Toys “R” Us continued to warehouse and supply toys.

Analysts said the deals are key because they provide Amazon with a bottom-line boost by being high-margin, low-cost operations.

Since it signed the Toys “R” Us deal, Amazon has inked similar deals with Target and Borders. Company executives said in recent conference calls that they hope to sign two major services deals per year going forward to help boost profitability.

Revenue River

Amazon brought in $225 million in services sales in its breakthrough fourth quarter, up from $198 million the year before. Overall, services accounted for around one-fifth of the company’s revenue. But according to analysts, services provide a more important bottom-line boost: They provide high margins, since Amazon does not handle products in many of its partnerships.

Kathman noted that even if Amazon smoothes things out with its partners, it may face limitations on its services business. For one thing, there is a limited amount of “prime real estate” on the e-tailer’s home page.

“A big reason these companies partner in the first place is to reach Amazon’s huge audience, but Amazon can only put so many tabs [on its Web pages],” he said.

“Amazon is still feeling its way in these service partnerships, and it’s made some mistakes, which it will hopefully learn from.”