Thanks for doing *your*
analysis on the book profitability accounts.
started with your analysis, and although I do not agree
with some of your margin assumptions, there appears to
me a glaring error in your initial math (from your
PT 1) of your post.
At the beginning, where
"Now let's look at all of the
Total expenses for S&M, PD,
When I calculate total M&S, PD, and G&A expenses:
(M&S)(179,424+(PD)57,720+(G&A)26,051, I get $263,195,000. If we reduce this expense by
$70M for non-book coupons, we get
47% of $193,195,000 is $90,801,650 and *not* the
$68,330,480 that you base the remainder of your
analysis/margin assumptions on. Is it possible that you have
removed the PD expenses for books? I hope not...
on fulfillment. Please keep up. The extra amount
involved mostly extra shipping charges to ensure packages
arrived before Dec. 25 and not the 26th during the rush
season. You won't have those type of time constraints any
other time of the year. Those costs will drop back to
Amazon's pre-hoiday norms and the co. has give guidance as
such. Q4 was 16% not 17.
The mention about
integration is merely a matter of form. In the early stages
of category development this is a no brainer. In the
meantime the company will enter "more new categories than
in 1999" as management has announced and is already
Amazon is already involved with food
and grocery through their investment in
The model is not to reduce space usage. The warehouse
expansion should have tipped you off to this. The smaller
items already formed the core of products in a very
practical way during the earliest part of the start up
stage (books, music, video). The goal now is to sell
everything and to increase absolute gross profit dollars,
not to fuss about how much space items will take up.
Of course what you say is true about electronics
which is why it receives priorty to be ramped up at
this time, in addition to the momentum in sales for
digital equipment. But it is not an exclusive mandate
which ignores the desire for many other categories
Amazon has admitted that their inventory system
is not well integrated in the SEC filings. Until
this is fixed, it argues against further product
lines. Amazon is spending 16-17% of the value of the
orders on fulfillment, which is well in excess of
Growth is predicated on at
least two elements: gaining market share in one's
existing enterprises and adding others. There are those
who argue that the internet is an ideal venue for
pornography, so maybe the next business will be sextoys.com.
They can sell "content" as well as the equipment.
If Amazon wanted to enter the food and grocery
arena, and I presume that they do, they would be prudent
to limit themselves to high-value/low weight,
nonperishable items because few people would want to pay the
full shipping cost, for, say, a 10 pound box of
laundry detergent. Consequently, they would do well to
partner with a company like New Braunfels Smokehouse,
which makes excellent beef jerky and other preserved
meats, and offer food gift baskets.
hitting the high end of the jewelry market with
Ashford.com. To hit the midrange of the jewelry market, they
could partner with Simply Whispers, a company that
makes excellent, moderate-cost jewelry. Earrings are
$7-15 a pair, and hypoallergenic.
difficulty that Amazon is having earning a profit in their
current enterprises, even subtracting away the
infrastructure buildout, I thought that Amazon might go after
greater depth in their current product lines rather than
add additional enterprises. They would certainly
prefer to increase their sales of high-dollar items like
electronics than sell an equal dollar volume of toys because
their shipping and handling costs will be much greater
in the latter case. It also has the advantage of
reducing the amount of space required per dollar of sales.
at 48? Personally I think you blew it much
earlier by not getting into YHOO even before you finally
decided to sell you AOL.
TWX? Gimme a break.
Ancient history. What we have here is a temporary case of
the Greenspans. But the effect won't last forever,
you know. Just long enough to fake you out.
There is nothing to prevent Amazon from building
warehouses simultaneously in different locations. My point
is that the failure to capture the entire cost of
operating the warehouses in the divisional results
understates the cost of operations, and hence the selling
expenses are understated.
When a building is in
operation, it is necessary to heat, cool, and maintain all
of it, not just the parts that are currently used to
store merchandise. Warehouse space is seldom fully
utilized because they are planned for peak periods.
Consider your kitchen cabinets at home. There are times
that they are fully stocked and times when they might
be half full.
I thought that growth was 170%
annually. I was looking at FY 98 vs. FY99 results. If the
warehouses are currently 10% occupied, they will be 27%
occupied in a year, 46% occupied in 2 years, and 78%
occupied in 3 years if growth is 170% a year and the
product mix is about what it is now. There will be
seasonal fluctuations in the demand for warehouse space. I
presumed that your statement that Amazon was planning for
2-3 years of growth was reflected in the amount of
space that they were building. At the three year mark,
they have built 10-15% more space than what would be
required even if the 170% annual growth rate was
I believe that the best that Amazon can sustain is
50% growth annually, which is purely my opinion, and
is the result of the fact that e-commerce is
becoming more competitive all the time. The rate at which
they are spending money argues against the long-term
viability of the company. There will have to be another
bond issue within a year to keep the company going
and/or a severe cutback in advertising and other
variable cost, and an increase in prices.
deny that Amazon "could" rent space to any of the
companies in which they have made investments. The point
remains that the space is underutilized at the present
time, and this fact is not captured in the statement of
selling expenses. It is a fixed operating cost that must
be captured so that the true cost of sales is
I'm finished with the warehouses now.
Mistake was to say "looking at the quarterly
figures, blah, blah..."
Looking at those numbers
gives you no idea about future growth. For one thing
you did not tell me how many new businesses you are
forecasting Amazon will enter and what their space
requirements will be. (Or maybe you are myopically fixated on
only the current businesses. Tsk, tsk...) I know your
first thought will be to evade making a forecast. To
cop out and say the company has not shared this info.
with you. But you can't make an irresponsible statment
about the space requirements such as you did in your
previous post and not be expected to be pressed about
Last year analysts began the year forecasting $1.2B in
sales for 1999. That turned out to be too low. Amazon
exceeded this amount by 37% with actual of 1.64B. Partly
this can be attributed to the success of many of the
newer businesses. Toys growth from 0 to 95M for
Now we have predictions of 2.75B for this
year and 4.6B in 2001 (a).
Even if they are on
target this means that on an absolute dollar basis that
the company may triple in size by 2001. If you take
into account the fact the forecasts may be too
conservative as in 1999, then this could mean in 2001 alone
actual growth to 6.302B by 2001 or nearly 4-fold
(And I'm still not factor in the 37% beyond the
estimates for the current year just to show you what a fair
minded guy I can be.)
But this is not only about
sales growth, as we were discussing space requirements.
DVD grew 500% YOY. Now we have higher space
requirement entries such as toys, electronics and home
improvements. As those grow exponentially over the next year or
two, space requirements at a somewhat faster rate than
Which is another flaw in your
hasty comment. Revenues and warehouse space are not
going to be growing at the same rates.
2000 revenue estimate:
new est. ....... prev.
$2.75B ....... $2.6B .....
2001 revenue estimate
new est. ....... prev.
$4.6B ......... $4.4B .... +4.45%
A fourth consideration is the ever-present 500
pound gorilla -- over-valued equity markets. This is
obviously a very big
issue for the Fed and a lesser one
(but growing) for the ECB. Alan Greenspan has recast
this issue completely since he first
"irrational exuberance" in December 1996 (at Dow 6437). In
last week�s Humphrey Hawkins testimony to the
Congress, he was quite explicit in equating the US
economy�s growth excess to the wealth effect: By his
reckoning, it was
roughly equivalent to one percentage
point of extra GDP growth. The fact that this excess is
thought to be largely
stock-market-induced is hardly
idle conjecture. Nor does it matter that stock market
strength is narrow or broad. The US
central bank has
been very deliberate in expanding its explanation of
what drives the real economy -- adding an
powerful wealth effect to traditional income
effects. The Fed, in my view, is sending an increasingly
clear signal that a
macro growth excess --
irrespective of its source -- must now be eliminated. While
this need not be interpreted as a strategy
explicit equity-market targeting, it could well be
tantamount to a strategy of implicit equity market
Fifth, is incrementalism. Neither the
Fed nor the ECB seem likely to make large
interest-rate adjustments at upcoming policy
core inflation still low, they have the luxury of
sticking to 25 bp tightening dosages. Moreover, with
economies more and more dependent on financial
markets, the possibility of destabilizing, asymmetrical
cannot be ruled out if equity markets
finally correct. Incrementalism allows central banks the
luxury of backtracking should
their policy actions
prove too disruptive. That, of course, would underscore
the ultimate moral hazard dilemma all the more.
My own guess is that G-2 central banks would welcome
an "orderly" correction in over-valued equity
an incremental approach to
tightening would enable the authorities to tough out the
There is an over-arching
theme to all of the above. In the depths of the
financial crisis (late 1998), central banks eased
aggressively in order to save the world. In doing so, they
essentially abdicated control over their real economies
financial markets. Global healing was a signal
that policy normalization was in order. But now as the
world moves beyond
healing, it is imperative for
central banks to act in order to regain control. The
longer they wait, the tougher that task will be.
risk is that short-term interest rates in both the
United States and Europe may have to rise a good deal
more than the 50
to 75 bps that financial markets
(and our US and Euroland economists) expect. New
Economy or not, some things never
change. Don�t fight
Excellent commentary from MSDW:
Roach (New York)
Even in the New Economy, it
may still pay to heed old rules. For investors, one
of the oldest is, "Don�t fight the Fed."
or not that adage can be amended to include the ECB
is an open question. But it�s increasingly clear to
me that two
of the world�s major central banks
are on a tightening path that poses considerable
risks to ever-complacent investors.
five key dimensions of central bank risk that I
believe will bear most critically on world financial
markets in 2000.
The first is an important tactical
shift in the approach to monetary policy. The central
bank tightening of 1999 was all about
"normalization" -- returning policy settings to the pre-crisis
norms that prevailed in early 1997. While the Fed and
have succeeded in normalizing nominal
short-term rates, they have not accomplished this objective
from the standpoint of
real interest rates. That�s
because there has been an oil shock that has boosted
headline inflation about 0.5 percentage point
pre-crisis norms. In other words, real interest rate
normalization requires more tightening than nominal interest
normalization; while G-2 central banks have
accomplished the latter, they have not achieved the former.
But there�s more driving central banks in 2000
than policy normalization. A second dimension of
policy risk is the coming
transition to a more
classic counter-cyclical monetary tightening. That�s
especially the case in a fully-employed US
where the Fed is now going out of its way to state
quite explicitly that GDP growth is far too fast. The
bank has made this statement in the
context of a significant upward revision to traditional
macro speed limits; old economy
speed limits were
thought to be around 2.25%, whereas new economy limits
are believed to be in the 3% zone. For a US
economy that has been on a 4.2% growth path for nearly
five years, and 6% over the past two quarters, enough
The Fed wants a slowdown. And, by the
way, to the extent that America�s growth dynamic has
been increasingly tech-led,
it seems reasonable to
believe that this sector will bear the brunt of the
A third element of central
bank risk is the time-honored credibility issue. As
Ottmar Issing of the ECB once said to me,
central banks have is our credibility." That credibility
is now under attack. There�s the "moral hazard play"
United States, where many believe that
the Fed is trapped in the context of an equity market
that has become too big too fail.
And there�s the
ECB�s own dilemma, with a sagging currency symbolic of
a new wave of politically induced
euro-skepticism; in that same vein, Joachim Fels has also made the
point that the ECB may simply believe that its
rates are too low to effectively manage the
Euroland economy. There�s only one way to regain the upper
hand on the
credibility front -- more aggressive
tightening than financial markets are expecting.
Nice designer bags so that you can be in style
Also, you can buy headbands -
they are on sale demand is drying up as the 60's wont
be here for long.
Poodle skirts and other
relics from the 50's are selling like hotcakes and for
the shorts thats good in two ways, first because the
50's are coming, and second because the more AMZN
sells the more they lose.
Come on bag holders is
$ 65 7/16 the best you can give me, I want to short
again, come on, prop up a little more.
beautiful day today.
The Glen Miller band members
are calling thier travel agent, they were hoping to
catch some spring training in Florida before having to
come up, we all thought at least the second week of
March before the 40's, but keep your seatbelt
Come on Bullshit upgrades, give us one more so we can
short this piece of crap from another false plateau.
I - and many other longs - have been critical of
the company at times. You don't know what you're
talking about. You haven't been here long enough to make
those baseless comments.