Amazon's Sales Soar, Lifting Profit

By GEOFFREY A. FOWLER

Amazon's strong sales gains in part reflect its acquisition of Zappos. Above, employees working at a Leipzig, Germany, warehouse last November.

Amazon.com Inc. posted a sharp increase in first-quarter profit, in a sign the online retail giant's sales are accelerating as consumer spending rises.

But the Seattle company continued to decline to disclose detailed sales figures for its heavily promoted Kindle e-book reader, which faces new competition from Apple Inc.'s iPad.

Consumers continued to flock to the Seattle retailer, which saw a 46% rise in sales for the quarter—above Wall Street expectations. Amazon isn't only growing faster than other major retailers, but is gaining market share in e-commerce, which analysts say is benefiting from a shift to online purchases by consumers.
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Amazon saw the largest sales boost in its catch-all category of electronics and general merchandise, which grew 72%, underscoring the fact that the online retailer is becoming more than just a books and media retailer. This was also the first full quarter to reflect Amazon's acquisitions of shoe and apparel retailer Zappos. The company didn't break out details on its impact.

"Customers are responding very positively to the increased selection, the great prices, and the value that we have," said Tom Szkutak, Amazon's chief financial officer. He added that higher adoption of the company's Prime shipping loyalty program was favorably influencing its growth rate.

Amazon's first-quarter profit rose 68% to $299 million, or 66 cents a share, from $177 million, or 41 cents, a year ago. Revenue rose to $7.13 billion from $4.89 billion.

Amazon's shares fell about 6% in late trading on Thursday, reflecting investors' high expectations for the quarter. The shares were up 2.5% to an all-time high of $150.09 in 4 p.m. trading on the Nasdaq Stock Market.

Investors may have been disappointed by Amazon's forecast for operating profit below Wall Street expectations. The company forecast operating profit between $220 million and $320 million, compared with analysts' estimate of $327.8 million, according to Thomson Reuters.
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"Amazon's shares have been priced to perfection in recent weeks, having held up against the iPad launch and a disappointing outlook from eBay. There wasn't a lot of wiggle room there," said Scott Tilghman, an analyst at Hudson Square Research, Inc.

Amazon's gross margins, or profit after cost of goods, were slightly lower than Mr. Tilghman had expected. That could reflect the short-term costs of rolling out new product categories in international markets, he said.

Amazon said Kindle sales remained "very strong," and that it now had 500,000 e-books for sale. With this earnings release, the company also changed the way it accounts for the Kindle, booking the full revenue from each device sold instead of amortizing it over several quarters.

In terms of competition with the iPad, Mr. Szkutak wouldn't specify what happened to sales in the lead up the device's launch. But he did suggest Amazon can also benefit from other hand-held devices that allow customers mobile access to its online store. "What we are excited about is that the world may shift to a place where everybody has a 3G connected device for browsing the Web," he said.

John Aiken, an analyst with Majestic Research, says his own proprietary Web traffic data suggests the Kindle device now accounts for 2% of Amazon's revenue and its e-book sales account for an additional 1.5%. "We assumed there would be a little bit of slowdown of Kindle sales into the iPad launch, and we really did not see that," he said.

As many as 7 million Kindles will likely have been sold by the end of the year, Mr. Aiken predicted, which could help drive earnings because Kindle owners appear to buy more books than other shoppers.

Write to Geoffrey A. Fowler at geoffrey.fowler@wsj.com