Los Angeles- Investors may have cheered Amazon.com last month as the Web retailer began to ease technology spending, but another recent development is now giving some pause — a jump in marketing costs.
While some analysts see early signs of improving margins amid less tech spending by Amazon — a hope that pushed its shares up 12 percent in one day after earnings were reported — others say that higher marketing costs are just the latest manifestation of a need to spend constantly in order to drive growth.
Marketing spending rose 50 percent over the prior year in Amazon's recently reported third quarter, outpacing the rise in sales, which climbed by nearly a fourth.
Amazon attributed the rise to promotions of its new items and product categories from auto parts to groceries as it competes against a growing list of rivals.
Amazon is also trying to challenge Apple Computer's dominance in the nascent digital arena with a recent roll-out of downloadable movies and videos.
Worry that the Web retailer won't reach its stated long-term goal of double-digit operating margins is driving concerns over spending. Continued…
"It's costing Amazon more to get each dollar of revenue," said Global Crown Capital analyst Martin Pyykkonen, who noted that the retailer is no longer the "automatic" choice for online shopping amid a broader range of rivals. "What does Amazon have to do? They have to spend more on marketing."
Amazon marketing costs in its third quarter were $64 million, about a third of its tech spending level and representing 2.8 percent of net sales.
Operating profit margin, pinched due to tech and content costs, was 1.7 percent in the quarter, down from 3 percent a year earlier and 2.2 percent in the second quarter of 2006.
"They're not going to get costs under control in the near term," said Morningstar stock analyst Joseph Beaulieu. Whether technology expense, marketing or even the costs of goods sold, he added, "None of these have abated to the point where you're starting to see better margins."
Beaulieu anticipates that Amazon's operating margins won't rebound to 2004 levels of 6.4 percent until 2010, by which point its growing size will help it buy goods more efficiently.
But Amazon has its bulls, including Legg Mason fund manager Bill Miller, who recently argued that Wall Street is wrong in assuming that Amazon's low-single-digit operating margin is a permanent fixture of its business model.
"Amazon's margins will soon begin a steady climb toward and perhaps into double digits," Miller wrote in a quarterly letter to shareholders of his Value Trust fund, without further explanation.