Amazon predicts weaker holiday, shares fall 14 percent

SAN FRANCISCO (Reuters) - Amazon.com Inc said sales in the holiday quarter would fall short of Wall Street expectations, sending its shares down nearly 14 percent as consumers cut back on spending and a strengthening U.S. dollar eroded the value of foreign sales.

The online retailer that sells everything from books to car parts has cut prices and added more products on its site to spur sales and take market share in a weak U.S. economy.

But investors fear that will not be enough to counter the effects of a financial markets crisis and signs of a deep global recession. Retailers, from giant Wal-Mart Stores Inc on down, have said that consumers are pinching pennies as never before.

"This is further confirmation that the economic downturn is much more pervasive than was earlier thought," said Sanford C. Bernstein analyst Jeffrey Lindsay.

"Online retailers were thought to be immune to it, but this is an indication that that is far from true," he said. "They are definitely signaling much worse returns in the fourth quarter."

A strengthening U.S. dollar is also cutting into the value of Amazon's international revenues, which account for 46 percent of total sales.

The Seattle company's third-quarter net income posted on Wednesday beat Wall Street estimates, rising 48 percent to $118 million, or 27 cents per share, from $80 million, or 19 cents per share, a year earlier. Analysts, on average, had been expecting earnings of 25 cents, according to Reuters Estimates.

But revenue of $4.26 billion, driven by a 52 percent jump in its electronics segment, fell just shy of the consensus view of $4.28 billion.

The company expects net sales for the fourth quarter, including the crucial holiday period, of $6.0 billion to $7.0 billion, or growth of 6 percent to 23 percent. It forecast operating income at $145 million to $305 million.

Analysts, on average, had been expecting sales of $7 billion in the fourth quarter, the company's busiest.

Amazon said it was proceeding cautiously, given slowed e-commerce spending and the overall turmoil in the global economy.

"Our guidance is certainly appropriately conservative. We think it's appropriate because we have limited visibility -- all companies have limited visibility at this time," said Chief Financial Officer Tom Szkutak on a conference call with reporters.

Amazon now expects net sales of $18.46 billion to $19.46 billion, compared with its earlier forecast of $19.35 billion to $20.10 billion. The average analyst estimate is $19.49 billion.

Full-year operating income is now expected to range from $716 million to $876 million, versus a previous view of $745 million to $920 million.

"You can drive a truck through the revenue outlook -- it's so wide. Conservative is an understatement," said Tim Ghriskey, chief investment officer of Solaris Asset Management. "Clearly they're expecting a weak holiday season, or at least preparing for that."

Some $500 million of the lowered 2008 revenue outlook is due to the strengthening U.S. dollar, Szkutak said.

Wall Street was already spooked when online auctioneer eBay Inc cut its forecast last week, predicting a weak holiday season due to softness in consumer spending.

Overall retail spending is down, whether at Amazon's brick-and-mortar rivals, or at online sites. Forrester Research predicted in a report released on Tuesday that holiday spending would grow 12 percent this year over 2007, compared with 18 percent growth in the last season.

Amazon cut its shipping prices in the United Kingdom to spur sales, and overall shipping costs in the third quarter rose as a percentage of net sales.

Asked how Amazon plans to manage costs should a global recession last up to two years, Chief Executive Jeff Bezos said: "We are going to continue to invest in the business but we will be especially prudent about how we make those investments."

Shares of Seattle-based Amazon are valued at 34 times 2008 projected earnings. This is at a premium to Internet stocks like eBay Inc and Yahoo Inc, at 9 and 29 times forward-looking earnings, respectively, and brick-and-mortar retailers such as Wal-Mart Stores Inc, at over 15.

Amazon shares, which have fallen 46 percent since January, dropped nearly 14 percent to $43.14 in extended trading. The stock had closed 24 cents lower at $49.99 on Nasdaq.

(Additional reporting by Syantani Chatterjee and Ryan Vlastelica, editing by Richard Chang)