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Amazon: Still No Profit Seen
Beverley Slopen and Jim Milliot -- 4/6/98
In its 10-k filing made to the Securities and Exchange Commission last week, the U.S. Web site Amazon.com repeated warnings that it d s not expect to be profitable anytime soon. Because of its relatively low gross margins and high investment expenditures, Amazon.com believes it will "continue to incur substantial operating losses for the foreseeable future and that the rate at which such losses will be incurred may increase significantly from current levels." Despite that warning, and the company's $33.6 million in cumulative debt, its stock price has soared from $18 per share when the company went public last May, to just over $85 per share at the end of March.
The company believes it will only achieve profitability once its sale volume is great enough to allow it to benefit from economies of scale. To that end, the company plans to continue to invest heavily in marketing and promotion, product development and technology and operating infrastructure in 1998.

High Employee Costs

During its brief history, Amazon's employee ranks have risen from 158 at the end of 1996 to 614 at the end of 1997, and the increased staffing accounted for a large part of the $12.5 million spent on product development last year. Amazon said it expects product development costs to increase significantly in absolute dollars in 1998 as it continues to expand. The online bookseller is also anticipating a significant increase in marketing and sales expenditures as it continues with its branding campaign, as well as expected higher costs of fulfillment due to greater sales. In 1997, Amazon spent $39 million on marketing and sales, including $21 million on advertising.

The company is also counting on international expansion to help it achieve profitability. In 1997, the international market accounted for 25% ($37 million) of total sales, compared to 33% in 1996. Although it did not disclose which foreign markets it plans to focus on, Amazon.com said that it expects to incur significant costs in the future in establishing international facilities and operations; in promoting its brand internationally; in developing localized versions of its Web site; and in sourcing, marketing and distributing product in foreign markets.
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