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    Is There Hope for Amazon? Paper Is There Hope for Amazon? Paper Document Transcript

    • Is There Hope For Amazon? A Strategic and Financial Audit Prepared for Professor Hugh Sherman Associate Professor of Strategy Copeland Hall 536 Athens, Ohio 45701 and Scott Wright Professor of Finance Copeland Hall 636 Athens, Ohio 45701 and Dr. Christine Yost Professor of Professional Communication Copeland Hall 540 Athens, Ohio 45701 Prepared by Beth Christensen Ayla Kirk Janae Sickmeier JBA Consulting One Nationwide Plaza Columbus, Ohio 43235 February 26, 2001
    • JBA Consulting One Nationwide Plaza Columbus, Ohio 43235 February 26, 2001 Professor Sherman Ohio University Athens, Ohio 45701 Dear Professor Sherman, Here is the report you requested February 2, 2001 containing an analysis of a struggling company in relation to its industry, along with our recommendations for how this company can improve their financial situation. The primary objective of this consultation focused on Amazon’s weaknesses and the industry threats that affect Amazon. After assessing Amazon, it has been determined that some of the most pressing areas are high marketing costs, over expansion of product base, vulnerabilities within the computer system, and poorly managed operational processes. The short-term recommendations that should be implemented immediately are to lower marketing costs and reduce product base. The long-term recommendations are to improve their computer system and hire and train workers who can adjust quickly to the newly automated systems. During the research period there was one restraint that caused problems. Due to the recent emergence of the online-industry, there was difficulty in finding financial information prior to 1998 for other competitors in the industry. Therefore, it was a little harder to get an accurate average of the industry for the financial ratios. We are grateful to Dr. Yost, Professor Wright, and Professor Sherman for giving us this opportunity to learn more about Amazon and how to perform a strategic and financial audit. Without this opportunity, we never would have known the extent involved in performing these audits, the strategy behind making such recommendations and the layout of a consulting paper. Please call, Professor Sherman, if you need additional information pertaining to this topic or have any questions for us. We would be more than happy to go over our findings in more detail or discuss our recommendations that we have mentioned. Sincerely, Beth Christensen Team Leader i
    • Table of Contents Executive Summary..........................................................................................................iii Introduction........................................................................................................................1 Online-Retailing Industry Analysis....................................................................................1 Power of Rivalry and Barriers to Entry..................................................................1 Weaknesses of Amazon......................................................................................................2 Recommendations for Amazon..........................................................................................3 Short-Term Recommendations...............................................................................3 Lowering Marketing Costs.........................................................................3 Reduction of Product Base.........................................................................4 Long-Term Recommendations...............................................................................4 Improve Amazon’s Operating System......................................................4 Conclusion..........................................................................................................................5 References..........................................................................................................................7 Appendices Appendix A: Interim Deliverable: Analysis of Online-Retailing Industry and Amazon...8 Appendix B: Trend and Industry Ratios For Years 1997, 1998, and 1999.....................16 Appendix C: Trend and Industry Analysis.......................................................................17 Appendix D: Pro Forma Income Statements and Year 2000 Income Statement.............18 Appendix E: Analysis of Pro Forma Income Statement..................................................19 Appendix F: Pro Forma Balance Sheet and Year 2000 Balance Sheet............................21 Appendix G: Analysis of Pro Forma Balance Sheet........................................................22 ii
    • Is There Hope For Amazon? A Strategic and Financial Audit Executive Summary The purpose of this report was to select a company whose performance was poor in relation to other companies within the same industry. The primary objective of this consultation was to focus on Amazon’s weaknesses and identify any threats to the industry that affect Amazon. JBA Consultants were hired to improve Amazon’s performance by providing recommendations. Amazon’s major weaknesses of high marketing costs, over expansion of product base, and poorly managed operational processes were addressed and recommendations given. Financial ratios were calculated to compare Amazon’s performance to the industry. Pro forma financial statements for the next three years were prepared to demonstrate how the recommendations would affect Amazon financially. Short-term recommendations consist of lowering marketing expenditures to six to eight percent of net sales and concentrating on keeping the repeat customers. Amazon should drop Cars and Lawn and Patio to reduce the product base. Long-term recommendations can be considered once financial stability has been achieved. These recommendations are to improve operational processes by distributing the computer system to several locations and creating a backup system. Amazon’s operational processes will also benefit from hiring and training new employees who can adjust quickly to the newly automated systems. JBA Consultants’ main goal was to enable Amazon to turn a profit. Lowering marketing expenditures to six to eight percent of net sales and focusing on repeat customers will save money. Dropping the Cars and Lawn and Patio segments will enable Amazon to reduce spending and specialize in more areas. Expanding computer system locations will decrease vulnerability to natural or purposeful disasters. Proper training sessions and hiring will improve operations. Ayla Kirk Beth Christensen Janae Sickmeier Is There Hope For Amazon? iii A Strategic and Financial Audit
    • Is There Hope For Amazon? 1 Introduction The following report reflects the current condition of Amazon and the online- retailing industry. Performing a SWOT analysis on Amazon has revealed the strengths that need to be capitalized upon and the weaknesses that require immediate improvement. Based on the weaknesses of Amazon and the industry analysis, it has been determined that Amazon’s current situation is in dire need of immediate change to prevent them from going bankrupt. Online-Retailing Industry Analysis After performing an industry analysis on the online-retailing industry, it has been determined that the most critical aspects to adversely affect Amazon are the power of rivalry and the low barriers to entry. Power of Rivalry and Barriers to Entry Expanded Web technologies have intensified competition for online-retailers. Ideas and designs that were once innovative are now easy to imitate. Differentiation in areas besides technology, such as customer service, advertising, and reliability will be crucial to succeed in the future. The rivalry is further intensified because of low barriers to entry in this industry. Low barriers to entry make it easy to enter the industry. The 17 percent growth rate of the online-retailing industry reflects the high growth rate caused by low barriers to entry. This trend makes the industry unattractive as compared to the average industry growth of two percent per year (Market Share Reporter, 2000). There
    • Is There Hope For Amazon? 2 are few barriers to enter the eCommerce industry, other than advertising costs. Virtually anyone can start a site, which increases competition in this industry. Limited government regulations also encourage entrepreneurship in the eCommerce industry, which creates an abundance of companies, making it difficult to differentiate. Weaknesses of Amazon Although Amazon sells to an impressive amount of domestic customers, as well as international, Amazon has yet to turn a profit. An interim deliverable was completed on February 19, 2001 that contains more detail of Amazon’s weaknesses located in Appendix A. Also, using information found in the Securities and Exchange Commission, a comprehensive ratio analysis on Amazon has been completed. This includes examinations of Amazon’s profitability, liquidity, debt management, and asset activity to assist in determining Amazon’s weaknesses located in Appendix B and C. Weaknesses that are most detrimental to Amazon, strategically listed in order of severity, include the following: • High marketing costs – 25 and 22 percent of net sales was spent on marketing in 1999 and 2000, respectively, thus revealing roughly $24.77 is spent per customer each year (Securities and Exchange Commission, 2001). • Expanding product base too quickly – Amazon reinvested nearly all profits back into the company by launching 18 new segments in 6 years (Amazon.com website, 2001). • Poorly managed operational processes o all computer systems are maintained at one location without backup systems, formal disaster recovery plans, or sufficient business interruption insurance and current employees, systems, procedures o controls may not be adequate to support and effectively manage future operations (Securities and Exchange Commission, 2001).
    • Is There Hope For Amazon? 3 Recommendations for Amazon The following recommendations have been divided into two categories of short- term and long-term actions. Short-term recommendations should be executed immediately in order to reduce the net loss, beginning this year. Long-term recommendations can be considered once financial stability has been achieved, defined as positive net profits, the ability to pay debts, and have remaining cash to reinvest. Short-Term Recommendations High marketing costs and over expansion of product base are the two most significant weaknesses to Amazon, and call for immediate action. Lower Marketing Costs. The average company spends five to seven percent of net sales on marketing expenditures each year (Standard & Poor’s Industry Surveys, 2000). Amazon spends nearly four times that amount each year (Securities and Exchange Commission, 2001). Since Amazon is a virtual company, Amazon relies solely on marketing to maintain and increase customer base. However, Amazon has attained the goal of strong brand awareness, proven by repeat customers making up 72 percent of Amazon’s 24 million-customer base (Securities and Exchange Commission, 2001). Therefore, Amazon should alter the corporate strategy by reducing marketing expenses to six to eight percent of net sales, simply to maintain the current customer base. This would allow Amazon to reduce marketing expenditures from $24.77 to $9.94 per customer per year. These marketing costs will mostly be used to encourage more
    • Is There Hope For Amazon? 4 purchasing from existing customers, and only a small percentage of the funds to attract new customers. Reduction of Product Base. Due to Amazon’s current situation, Amazon can no longer maintain all current product segments. The corporate strategy of Amazon to allow “customers to discover anything they may want to buy online” was expanded upon too quickly. Two segments that are advised that Amazon eliminate are Cars and Lawn and Patio. The Car line is not showing high online demand. Consumers prefer a hands-on experience when purchasing cars and usually benefit from negotiating price with a salesman. Lawn and Patio equipment generates high inventory and shipping costs. Amazon does not have the competitive advantage of being first-to-market in either of these segments nor does Amazon have widely known allies such as the alliance with Toys R Us (See Appendix A). Long-Term Recommendations Poorly managed operational processes is a secondary weakness that needs to be addressed only after the short-term recommendations have been implemented and finances are accessible. The means to finance these recommendations are predicted to be available in 2006 if trends continue as shown on the pro forma income statements in Appendix D and E. Improve Amazon’s Operating System. Operational costs for Amazon were roughly $896 million and $1.5 billion for 1999 and 2000, respectively. High operational costs
    • Is There Hope For Amazon? 5 imply that Amazon needs to improve the operational processes and utilize each worker to his or her fullest potential. Thus, “Amazon needs to expand, train, and manage their employee base” (Securities and Exchange Commission, 2001). Proper training will allow Amazon to fully capitalize on the newly automated system. This process will require large expenditures that are not available now. Therefore, money must be accumulated before this process can be considered. However, after an investment has been made to improve operations, and the system has been acclimated, long-term benefits will be experienced through diminished operational costs. A second major factor that needs to be addressed within Amazon’s operating system is that Amazon has only one location in which the entire computer system is contained. Amazon needs to distribute the computer systems to several locations, thus making Amazon less vulnerable to natural or purposeful disasters. In addition to distributing the computer system, a backup system must be created to prevent delays or interruptions that can cause the loss of critical data and customer orders. Customer loyalty will diminish if technical difficulties hinder the availability of the Website and ease to purchase orders. Conclusion After assessing the current condition of Amazon, it has been determined that Amazon’s future existence relies on the immediate implementation of lowering marketing costs and eliminating two product segments to turn a profit. Once financial stability has been achieved in approximately 2006, the long-term recommendations to improve the operations process can be addressed. If these recommendations are followed, Amazon will not go bankrupt as analysts have predicted, and they will be
    • Is There Hope For Amazon? 6 highly profitable within ten years. Refer to Appendix D, E, F and G for projected figures for years 2001, 2002, and 2003, taking into account all the previous recommendations for Amazon.
    • Is There Hope For Amazon? 7 References Amazon (2001). Mission Statement. Amazon.com. Retrieved February 18, 2001 from the World Wide Web: http://www.amazon.com/exec/obidos/subst/misc/company- info.html/ref=gw_m_b_aa/107-8232817-5101368. Bossong-Martines, Eileen M. (Ed.) (2000). Standard & Poor’s Industry Survey (Vol. 1). The Gale Group. Christensen, B., Kirk, A., & Sickmeier, J. (2001). “Analysis of Online-Retailing Industry and Amazon.” Athens, OH: Integrated Business Cluster. Lazich, Robert S. (Ed.) (2001). Market Share Reporter: An Annual Compilation of Reported Market Share Data on Companies, Products, and Services. The Gale Group. Securities and Exchange Commission: Amazon 10-Q Annual Report 2000 & 1999. Retrieved February 10, 2001 from the World Wide Web: http://www.freeedgar.com/oem/merri… Frame=0&CompanyName=Amazon+Com+Inc. Securities and Exchange Commission: Wal Mart 10-Q Annual Report 1999. Retrieved February 10, 2001 from the World Wide Web: http://www.freeedgar.com/search/ FilingsResults.asp? SourcePage=CompanyList&CIK=104169&UseFrame=1&FormType=&DateFile d=&CompanyName=WAL+MART+STORES+INC. Securities and Exchange Commission: Priceline Com 8-K Annual Report 1999. Retrieved February 10, 2001 from the World Wide Web: http://www.freeedgar.com/search/FilingsResults.asp? SourcePage=CompanyList&CIK=1075531&UseFrame=1&FormType=&DateFil ed=&CompanyName=PRICELINE+COM+INC. Securities and Exchange Commission: Priceline Com 8-K Annual Report 1999. Retrieved February 10, 2001 from the World Wide Web: http://www.freeedgar.com/search/FilingsResults.asp? SourcePage=CompanyList&CIK=1065088&UseFrame=1&FormType=&DateFil ed=&CompanyName=EBAY+INC.
    • Is There Hope For Amazon? 8 Appendix A: Interim Deliverable: Analysis of Online-Retailing Industry and Amazon Online-Retailing Industry The following report contains an industry analysis on the online-retailing industry and an in-depth look at Amazon. The purpose of this report is to select a company that has been unsuccessful and then to determine whether the industry is adversely affecting the company, whether it is solely the company’s fault, or a combination of both. After analyzing the industry, the competitive advantages of Amazon and the company’s weaknesses, it will be determined where changes need to be made to place the company on the track to success. Market Analysis Based on the following research, it has been determined that entering the online- retailing industry would be a risky venture due to the unattractive nature in comparison to other industries. Low barriers to entry and high power of rivalry are factors that indicate that this industry is unattractive. Demand Analysis The DotCom phenomenon is unlike any other. Many Internet companies have caught on to the trend in the past five years. Ecommerce, or retailing via the Internet, has experienced exponential growth in the past few years. Unlike the average industry that is growing at two percent each year, eCommerce is currently growing at about 17 percent per year, indicating this industry is in a growth stage. This fact is one of the few that presents this as an attractive industry (Market Share Reporter, 2000).
    • Is There Hope For Amazon? 9 Power of Rivalry Expanded Web technologies are increasing competition for online retailers. Ideas and designs that were once innovative are now easy to imitate. Differentiation in areas besides technology, such as customer service, advertising, and reliability will be crucial to succeed in the future. Barriers to Entry In the eCommerce industry, the barriers to entry are low. This makes the industry unattractive compared to other industries. There are very few barriers to enter the eCommerce industry. The only significant barrier is the advertising costs. Almost anyone can start a site, which increases competition in this industry. Limited government regulations also encourage entrepreneurship in the eCommerce industry. This creates an abundance of companies, making it more difficult to differentiate. Trend Analysis There are several trends that are affecting online-retailing today. One such trend is the shifting demands of the target audience based on the changing demographics. Another trend that will be addressed is the alliances that are taking place to remain competitive. Demographics. The demographics in the United States are shifting, thus affecting the eCommerce market. With the Baby Boomer generation aging, 41 percent of the U.S. population will be 45 or older by 2003 (Bossong-Martines, 2000). This will have a significant impact on purchasing trends. The Baby Boomers are now more concerned with paying for college tuition, retirement funds, and health care, drawing emphasis away from fashion (Bossong-Martines, 2000).
    • Is There Hope For Amazon? 10 Generation X consists of people born between 1965 and 1977. This generation has generally moved out on their own and started their adult lives. Now, the number of people in their early twenties has dwindles, resulting in less demand for products for homes. Sales of household appliances, furniture, and house ware have recently declined (Bossong-Martines, 2000). Alliances. Another current trend in the eCommerce business is the forming alliances between online companies with other online companies and with traditional brick and mortar companies. These alliances are necessary to maintain a competitive advantage. Forming alliances with well-known companies increases customer base and awareness, and reduces marketing and advertising costs. Threats There are several threats that could adversely affect the online-retailing industry. The government has mentioned the implementation of a sales tax on purchasing products online, and many brick and mortar stores are creating websites. Tax Implementation. One possible threat is the implication of a new sales tax on all products or services purchased online. In the past, it has been a benefit that the eCommerce industry has been exempt from sales tax. Although this will not have a fatal effect on the online-retailing industry, it could discourage some people from purchasing items online. Brick and Mortars Creating Websites. An additional problem for online-retailers is that Wal-Mart, Target, and other traditional retailers have been establishing websites. “Many analysts believe that as the brick and mortar retail stores get their feet wet in the online retailing sector, Amazon will soon see a large decrease in its stronghold on the
    • Is There Hope For Amazon? 11 online-retailing market,” (Muhlhauser, 2000). Amazon’s brick and mortar competitors have longer operating histories, larger customer bases, greater brand recognition, and significantly greater resources. These competitors are able to secure long-term contracts with suppliers and adopt more aggressive pricing and inventory policies. Also, competitors are able to invest more money into technology development and marketing. Symptoms of Trends Based on the following threats and problems in the industry, there are several symptoms that indicate the unattractive nature of this industry. These symptoms include the folling: online-retailers reporting negative net profits on their income statements; stock prices plummeting over the past year; many companies filing for bankruptcy; and P/E ratios not being applicable. These symptoms indicate that investors have virtually no confidence in the future stability of the company. Amazon Amazon is a broad-based online retailer. Founded in 1994, Amazon now has the largest pool of transacting consumers, which consists of a 24 million-customer base (The Business Journal, 2000). Amazon’s competitive advantage is their brand name recognition and strong customer loyalty. Sixty percent of all Amazon purchases are made by repeat customers (The Business Journal, 2000). “Amazon’s mission is to maintain the founding commitment to customer satisfaction and the delivery of an educational and inspiring shopping experience,” (Amazon.com). Amazon’s target audience who is in their late teens to late fifties, consists of middle- to upper-class people of a high educational level, defined as primarily college graduates, and who have caught on to the technology trend.
    • Is There Hope For Amazon? 12 Competitive Advantages Amazon’s competitive advantage is their first-to-market advantage, which has established customer loyalty and helped form alliances with reputable companies. Amazon has also strengthened ties with their customers through high levels of customer satisfaction. First-to-Market Advantage. “Amazon pioneered online shopping, eCommerce, and delivery that’s commonplace today,” (The Business Journal, 2000). Strong brand recognition stemmed from being first in this industry, thus establishing customer loyalty and causing both brick-and-mortar retailers as well as online-retailers to take notice of this company. Alliances with companies such as Toys R Us and DrugStore.com have led to increased customer and product bases. These alliances allow Amazon to avoid the learning curve in entering new categories and help avoid inventory risks. Customer Service. Amazon has targeted three areas to enhance customer service. These aspects are convenience, low prices, and an enjoyable shopping experience. Convenience is accomplished through Amazon’s technological advancements making their site easy to use and giving them a competitive advantage. These advancements include personalized shopping services, secure payment protection, wireless access to the website, and their new 1-Click program. The 1-Click program offers customers the convenience of not having to re-enter their shipping and billing information, allowing them to click once and buy. Low Prices are key to attracting and maintaining Amazon’s customers. The website offers a price comparison next to each product as compared to the list price. This
    • Is There Hope For Amazon? 13 technique reinforces to the customer the idea of saving money by purchasing from Amazon. Enjoyable shopping experiences encourage repeat visits, extended shopping time, and referrals to friends. Amazon attempts to make their website enjoyable by providing a buyer recommendation program that gives customer a list of other items that may interest them, based on their purchasing habits. Amazon allows users who are browsing the music store to listen to sample audio files. Amazon also has an auction site where people can buy or sell used goods online. Weaknesses Although Amazon sells to an impressive amount of domestic customers, as well as international, Amazon has yet to turn a profit. After assessing Amazon, it has been determined that the following weaknesses are contributing to the detriment of this company. Over Abundance of Product Segments. Amazon offers a wide variety of products on their website. By offering a wide array of items to online shoppers, Amazon is diluting its ability to maintain their customer service standards and their brand recognition. Analyst Ken Kassar reported, “I would’ve assumed a year ago, and I still believe, that as Amazon goes after more and more markets they are going to be less effective as a bookseller,” (Muhlhauser, 2000). Inadequate Technology. Increased traffic on Amazon’s website and increased sales volume have pushed Amazon to realize they have to upgrade their systems and network infrastructure. Without these upgrades, Amazon could face additional system interruptions, slower response times, and diminished customer service. Another
    • Is There Hope For Amazon? 14 weakness is that Amazon does not have a backup system. If a disaster were to occur, such as a computer virus or fire, it could be potentially fatal for Amazon. Short-term Contracts with Suppliers. Amazon currently has few suppliers; the three main suppliers to their entertainment market are Ingram Book Group, Baker Taylor Inc, and Valley Media Inc. Amazon does not have long-term contracts with their suppliers, creating less stability for the future. Amazon’s suppliers have the right to not renew contracts, forcing Amazon to form new alliances with short notice (SEC, 2000). Conclusion After assessing the online-retailing industry as well as Amazon, it can be determined that the company is suffering from both internal and external forces. The industry in which Amazon operates is unattractive at this time. Amazon benefits from two main competitive advantages. These advantages are being first-to-market in the online-retail industry and maintaining a strong customer loyalty, however, if these advantages are not capitalized on in the near future, or new ones created, it could be fatal to their success.
    • Is There Hope For Amazon? 15 References Amazon (2001). Mission Statement. Amazon.com. Retrieved February 18, 2001 from the World Wide Web: http://www.amazon.com/exec/obidos/subst/misc/company- info.html/ref=gw_m_b_aa/107-8232817-5101368. Bossong-Martines, Eileen M. (Ed.) (2000). Standard & Poor’s Industry Survey (Vol. 1). The Gale Group. Lazich, Robert S. (Ed.) (2001). Market Share Reporter: An Annual Compilation of Reported Market Share Data on Companies, Products, and Services. The Gale Group. Muhlhauser, M., Narayan, S., Norman, A., Paulos, A., & Sostarich, R. (2000). Amazon.com: An Analytical View of Future Stock Performance. Athens, OH: Ohio University MBA Program. Ogden, Mike. (2000, December). Here’s the Book on Amazon.com’s Future: Don’t Bet Against Online Giant. Business Journal. Retrieved from the World Wide Web February 16, 2001: http://kansascity.bcentral.com/kansascity/stories/2000/12/11/smallb2.html. SEC 10-Q Report. Retrieved February 10, 2001 from the World Wide Web: http://www.freeedgar.com/oem/merri… Frame=0&CompanyName=Amazon+Com+Inc.
    • Is There Hope For Amazon? 16 Appendix B: Trend and Industry Analysis For Years 1997, 1998, and 1999 Profitability Ratios 1997 1998 1999 Gross Profit Margin AMAZON 19% 22% 18% IND 62% 46% 32% Operating Profit Margin AMAZON -22% -18% -37% IND 9% -53% -88% Net Profit Margin AMAZON -21% -20% -44% IND 4% -82% 64% Return on Assets AMAZON 8% 19% 29% IND 2% 5% 13% Return on Equity AMAZON -108% 19% 29% IND 17% -44% -17% Liquidity Ratios Current Ratio AMAZON 3.09 2.63 1.37 IND 1.88 3.45 3.3 Quick Ratio AMAZON 2.89 2.44 1.07 IND 1.32 3.11 2.96 Debt Ratios Debt To Total Assets AMAZON 81% 79% 89% IND 68% 46% 41% Debt To Equity AMAZON 424% 367% 828% IND 144% 185% 244% Times Interest Earned AMAZON 99.98 4.09 7.16 IND 35.05 7.44 2.24 Asset Activity Ratios Inventory Turnover AMAZON 16.47 20.67 7.43 IND 11.48 13.84 7.64 Total Asset Turnover AMAZON 0.97 0.94 0.66 IND 1.43 1.37 1.21
    • Is There Hope For Amazon? 17 Appendix C: Trend and Industry Analysis Trend and Industry Analysis The ratios in Appendix A are used to compare Amazon’s past and present performance and the online-retailing industry performance. The profitability ratios measure how Amazon’s returns compare to its sales, asset investment, and equity. The liquidity ratios measure the ability of Amazon to meet its short-term obligations. Debt ratios are used to assess the relative size of Amazon’s debt load and Amazon’s ability to pay off the debt. Asset Activity Ratios measure how efficiently Amazon uses its assets. Profitability Ratios. Amazon had negative net income for 1997, 1998, and 1999. This resulted in a negative value for net profit margin, return on assets, and return on equity for each of these years. Amazon had lower gross profit, operating profit, and net profit margins than the online- retailing industry norm for that three-year time period except for the 1998 operating profit and net profit margins. Debt Ratios. The return on equity was a lot lower than the industry norm in 1997, then in 1998 and 1999, Amazon’s return on equity was much higher then the industry. Amazon had a high debt load throughout the three-year period. The debt to total asset ratio is consistently above 79 percent, whereas the industry norm for this ratio is 68 percent or lower. A high debt load magnifies the changes in the return on equity ratio values. The times interest earned ratio shows that Amazon covered its interest expense with its operating income. The value of this ratio was much greater in 1997 with 99.98 and then fell in 1998 and 1999 to 4.09 and 7.16. Liquidity Ratios. The current ratio has been steadily decreasing over the past three years, 1999 having the lowest value of 1.37. Having two times or more the amount of current assets as current liabilities is a good target for most companies. Amazon does not have a good liquidity position compared with the industry norm of 3.3 in 1999. The quick ratio has jumped every year. In 1997, Amazon’s quick ratio was way above the industry norm. In 1999, it plummeted to 1.07 compared with the industry norm of 2.96. This means that when inventory is subtracted from total current assets, Amazon’s liquidity was not steady. Asset Activity Ratio. The inventory turnover ratios suggest that Amazon was consistent in years 1997 and 1998, but in 1999 Amazon’s inventory turnover ratio fell to 7.43 from 20.67 in 1998. This suggests that Amazon did not match its inventory to its demand for products. The total asset turnover was consistently lower than the industry norm. Conclusion. A complete ratio analysis on Amazon has been completed, including examinations of the Amazon’s profitability, liquidity, debt management, and asset
    • Is There Hope For Amazon? 18 activity. The trend and industry analysis was combined to show how Amazon performed relative to the online-retail industry.
    • Is There Hope For Amazon? 19 Appendix D: Pro Forma Income Statements and Year 2000 Income Statement In Thousands Net Sales 2000 Net Sales PF 2001 %Net Sales PF 2002 %Net Sales PF 2003 %Net Sales % Net Sales $2,761,983 100% $2,982,942 100% $3,221,577 100% $3,479,303 100% COGS 2,106,206 76% 2,267,036 76% 2,448,398 76% 2,644,270 76% Gross profit 655,777 24% 715,906 24% 773,178 24% 835,033 24% Operating expenses Marketing and sales 594,489 22% 238,635 8% 193,295 6% 208,758 6% Tech and content 269,026 10% 269,026 9% 269,026 8% 269,026 8% General and Admin 108,962 4% 87,170 3% 87,170 3% 87,170 3% Stock-based compensation 24,797 1% 20,000 1% 15,000 0% 12,500 0% Amortization of goodwill 321,772 12% 119,318 4% 119,318 4% 119,318 3% Impairment related and other 200,311 7% 75,000 3% 75,000 2% 75,000 2% Total operating expenses 1,519,357 55% 809,149 27% 758,809 24% 771,772 22% Loss from operations (863,580) -31% (93,243) -3% 14,370 0% 63,261 2% Interest Expense (242,797) -9% (350,000) -12% (500,000) -16% (350,000) -10% Loss before equity (1,106,377) -40% (443,243) -15% (485,630) -15% (286,739) -8% Net Equity in losses (304,596) -11% (325,000) -11% (350,000) -11% (300,000) -9% Net loss (1,410,973) -51% (768,243) -26% (835,630) -26% (600,000) -17%
    • Is There Hope For Amazon? 20 Appendix E: Analysis of Pro Forma Income Statement Analysis of Pro forma Income Statements The analysis is an explanation for the projected figures that will result from following the proposed changes by JBA Consultants. Net Sales – JBA Consultants predict that Amazon’s net sales will continue to grow at about 108 percent for the next three years. At one point, between 1997 and 1998, Amazon experienced a growth rate for net sales of about 400 percent. Each subsequent year, the net sales have increased, but at a significantly less rate of growth. A 108 percent growth rate holds with the predicted trend for 2001. With a shifting strategy leaning towards maintaining customer base, assumptions for the future are that the growth rate for sales will remain a constant 108 percent. Cost of Goods Sold (COGS) – Amazon’s cost of goods sold cannot easily be changed. Therefore, the COGS will remain as a constant percentage of net sales. Gross Profit – Gross Profit will increase each year, but it will remain at a constant 24 percent of net sales. Marketing and sales expense – High marketing and sales expenses have been pinpointed as the most problematic expense for Amazon. Expenses have accounted for 22 percent of net sales. Amazon has successfully achieved its goal of ascertaining brand recognition. Therefore, it is no longer necessary to invest so much money into marketing and sales. It is recommended that Amazon spend six to eight percent of net sales for marketing and sales expenses, which is comparable to the average company that spends five to seven percent. For the year 2001, marketing expenses have been set at eight percent of net sales and in the following years, it has been lowered to six percent. This will significantly reduce operating expenses. Technology and content – Expenses for technology and content will remain constant over the next three years. Expenses will not increase until Amazon has reached financial stability, which is predicted to be in 2006. At that point, Amazon will address its long- term recommendations of improving operational systems, which will raise technology and content expenses. General and Administrative – General and Administrative expenses will go down in 2001 due to a 10 percent cut in the workforce and a reduction in rent expenses from cutting two product segments. Expenses will remain constant in the following years because there is no anticipation of hiring new workers or adding new product lines in the short future. Stock-based compensation – Stock-based compensation is anticipated to go down in the next three years. This assumption is based on past trends and on projections that the stock will not be going up in the near future.
    • Is There Hope For Amazon? 21 Amortization of goodwill– This expense will go down significantly in the future. One reason for the decline is that Amazon will be cutting two product lines: Cars and Lawn and Patio. Amazon has an alliance with CarsDirect so they are paying them large amounts to maintain this alliance. When cars are dropped, they will no longer have to pay this expense. Another reason for the decline was based on Amazon’s pro formas for 2000. The income statement indicated that this was an atypical year for Amazon, which made the operating costs extremely high. Therefore, in a typical year the operating costs, which include amortization of goodwill, will be significantly reduced. Impairment related and other – This expense is correlated with the amortization of goodwill. Therefore, because amortization is projected to decline, impairment will decline as well in relation to the amount amortization declines. Interest Expense – Interest expense is predicted to go up at an increasing amount as the debt goes up. In 2003, Amazon will begin to pay off long-term debt. This will lower the interest expense. Net Equity losses– The loss for 2001 is based on past trends. As the interest expenses have gone up, the net equity losses increases as well. This trend will continue in the future, however, in 2003 when the interest expense goes down, the equity loss will go down as well. Dividend Policy – It should be noted that Amazon does not pay dividends to shareholders; therefore, dividends are not mentioned within the pro forma income statement.
    • Is There Hope For Amazon? 22 Appendix F: Pro Forma Balance Sheet and Year 2000 Balance Sheet (thousands) Current Assets 2000 % Assets PF 2001 % Assets PF 2002 % Assets PF 2003 % Assets Cash & Mktable Sec $1,100,522 52% $1,353,642 63% $1,544,189 66% $1,100,656 57% Accouts Receivable N/A N/A N/A N/A N/A N/A N/A N/A Inventory 174,563 8% 120,448 6% 108,403 5% 110,254 6% Current assets 86,044 4% 92,928 4% 95,413 4% 99,671 5% Total current assests 1,361,129 64% 1,567,018 73% 1,748,005 75% 1,310,581 68% Fixed assets 366,416 17% 384,737 18% 400,821 17% 425,987 22% Goodwill 158,990 7% 31,798 1% 23,115 1% 20,147 1% Other intangibles 96,335 5% 38,534 2% 31,845 1% 28,659 1% Investments in equity 52,073 2% 20,977 1% 14,020 1% 11,456 1% Other investments 40,177 2% 18,250 1% 12,571 1% 10,236 1% Other assets 60,049 3% 90,074 4% 109,513 5% 134,002 7% Total Assets 2,135,169 2,151,388 2,339,890 1,941,068 Current Liabilities % Liab % Liab % Liab % Liab Accounts Payable 485,383 23% 509,652 45% 521,238 50% 534,128 30% Notes Payable 489,573 23% 886,127 78% 1,102,257 106% 1,452,687 81% Total Current Liab 974,956 46% 1,395,779 123% 1,623,495 156% 1,986,815 110% Long-Term Debt 2,127,464 100% 3,212,653 283% 3,954,875 380% 3,412,855 190% Total Liabilites 3,102,420 145% 4,608,432 405% 5,578,370 537% 5,399,670 300% Common Stock 3,571 0% 3,501 0% 3,421 0% 3,328 0% Additional Paid-in Cap 1,338,303 63% 1,498,899 132% 1,598,925 154% 1,645,236 91% Stock-based Comp (13448.00) (0.01) (7765.00) (0.01) (4232.00) (0.00) (1654.00) (0.00) Accum. Comp. Loss (2376.00) (0.00) (3302.00) (0.00) (4152.00) (0.00) (5412.00) (0.00) Accumulated Deficit (2293301.00) (1.07) (4962583.00) (4.36) (6132585.00) (5.90) (5242987.00) (2.92) Stockholders' Equity (967251.00) (0.45) (3471250.00) (3.05) (4538623.00) (4.37) (3601489.00) (2.00) Total Liabilities & Eq. 2,135,169 1,137,182 1,039,747 1,798,181 Add. Funds Needed 0 1,014,206 1,300,143 142,887 Appendix G: Analysis of Pro forma Balance Sheet Analysis of Pro Forma Balance Sheet
    • Is There Hope For Amazon? 23 This analysis is an explanation for the projected figures that will result from implementing the proposed changes by JBA Consultants. Any category listed on the balance sheet, but not mentioned in this analysis was not affected by the recommendations, and therefore estimations were made based on data from previous years. Cash & Marketable Securities – Cash, cash equivalents, and marketable securities are predicted to increase with the trend for the next two years, as it did for the last six years. However, in 2003, nearly 600 million dollars will be used to pay off long-term debt. Inventory – Due to the elimination of two product segments in 2001, inventory value will decrease. The Car segment will not affect inventory since Amazon does not presently hold cars in inventory. Amazon does not have an ally for the Lawn and Patio segment, so Amazon currently holds inventory for that segment. When Lawn and Patio products are no longer sold, after the end of the summer season, inventories will be reduced. Also, Lawn and Patio products are larger in size than most other products because of outside furniture and grills. Therefore, it is estimated that inventories will be reduced by approximately 30 percent in 2001 and an additional 10 percent in 2002. Long-term debt – Amazon’s long-term debt has been increasing by almost one billion dollars each year since 1998. It has been determined that this trend will continue until 2003 when Amazon has been instructed to pay off approximately 600 million dollars of long-term debt. This is possible because new segments are no longer being added as in previous years. Amazon used available cash to increase product base for the last six years, and now Amazon is maintaining current segments. Beginning in 2003, cash will be used to pay off long-term debt. Common Stock – After a profitable year for the stock market overall in 1999, Amazon saw a slight increase in stock. However, as Amazon experiences more and more financial trouble, stocks are falling and investors are dwindling. This pattern is reflected by a slow, gradual decline in common stock through 2003. After financials improve, and Amazon appears to have a prosperous future, in 2004 or 2005, investors will likely return. Stock-based Compensation – As Amazon’s stock has lost value, stockholders have pulled out or decreased investments. This lowers stock-based compensation each year. Accumulated Deficit – Accumulated deficit is comparable to retained earnings for a company in debt. As shown from previous data, the rate of increase is slowing for Amazon. If the trend in accumulated deficit holds true, it will increase by more than $2.6 billion dollars from 2000 to 2001 and $1.1 billion dollars from 2001 to 2002. As Amazon begins paying off long-term debt in 2003, accumulated deficit will decrease.