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Amazon Really Wants Its Toys

Posted on: Wednesday, 26 April 2006, 12:00 CDT

By Monica Soto Ouchi, The Seattle Times

Apr. 26--In an odd turn of events, Amazon.com said Tuesday it wants to reinstate its embattled, longtime partnership with Toysrus.com.

Toysrus.com -- the online arm of Wayne, N.J.-based Toys R Us -- won the right last month to sever its 10-year agreement with Amazon following a bitter two-year legal battle over terms of the contract.

That ruling put into motion a 90-day separation agreement between the companies, one that would remove the online toy store's vast selection from Amazon's site by June 30. Neither company won monetary damages.

Amazon Chief Financial Officer Tom Szkutak said Tuesday that Amazon has appealed the termination of the contract and is confident it will prevail.

"We're trying to get the contract reinstated," Szkutak said.

Amazon announced its first-quarter financial results after regular trading ended.

If Amazon doesn't win in court -- and a complex appeal such as this could take at least a year to resolve -- it said its operating profit could be reduced by as much as $25 million in the second quarter and $50 million for the fiscal year due to loss of the contract.

Amazon has forecast a second-quarter operating profit in the range of $32 million to $67 million. A $25 million drop in operating profit could potentially wipe most of its profit.

Toysrus.com sued Amazon in May 2004, saying it had violated an exclusivity agreement by allowing other partners to sell toys on its site, a right the toy company had paid $50 million a year to own.

Amazon denied the claim and countersued, citing what it called its partner's "chronic failure" to meet toy demand during the 2003 holiday season.

In the countersuit, Amazon claimed that more than 20 percent of the toy store's best-selling items were unavailable on the site during the peak of the season.

Both parties sought to end the partnership and to collect damages.

The companies went into mediation with prominent Bay-area mediator Randall Wulff, principal of Wulff, Quinby & Sochynsky.

But even Wulff, who mediated the $1.1 billion antitrust settlement between Microsoft and the state of California, couldn't bring the sides together. The companies met last September in court.

In a strongly worded 133-page judgment, New Jersey Chancery Court Judge Margaret Mary McVeigh ruled in March that Amazon had breached the agreement and damaged its partner's unique position and ability to plan or craft strategies. Amazon strongly disagreed, saying its partner's claims lacked merit.

The question is whether Amazon has a solid chance of reinstating the partnership -- and why it would want to.

Amazon appealed McVeigh's decision earlier this month and asked the judge to suspend the ruling until the appeal is resolved by a higher court.

This would mean Amazon and Toysrus.com would stop the separation process and continue to work as partners until the appeal was heard. It would also mean Amazon could continue to collect its fixed payments from Toysrus.com.

Toysrus.com said in court filings that it paid $50 million in annual fixed fees, plus other fees. That amounts to $12.5 million a quarter in base fees that Amazon could no longer collect.

Last Thursday, McVeigh denied the motion for a stay.

In the order, McVeigh wrote that she would approve a stay if all other third-party sellers of toys, games and baby products were removed from the Amazon site.

"[Toyrus.com] would be provided with that indefinable brand protection it sought, and Amazon would continue to maintain 'the largest forum in the world for the sale of these products,' " she wrote. "This proposal was outright rejected by Amazon.

"In fact, this Court was told that it should simply deny the application for the Stay because Amazon would not consider accepting the proposal as a reasonable condition."

Amazon appealed McVeigh's order to the New Jersey Superior Court's Appellate Division and filed a motion for urgent review. The appeals court denied the motion and will hear the case in due course.

When asked Tuesday during an analysts' call why Amazon was confident it would win, CFO Szkutak sidestepped the question.

"Again, beyond the filings that we've made to date, we have a practice of not commenting on ongoing litigation," he said.

Amazon reported a first-quarter profit of $51 million, or 12 cents a share, a 34.6 percent decline versus a year ago. The results were in line with analysts' expectations.

The company said it benefited from a one-time, $26 million accounting change in the year-ago period. Minus the gain, its quarterly profit was flat when compared with the year before.

Sales, meanwhile, rose 19.8 percent to $2.3 billion.

Amazon has invested significant time and money on technology and shipping promotions in recent years -- investments that have chipped away at its bottom line.

After finding success in its first promotion -- one that offered to foot the shipping bill for orders worth $25 or more -- the company introduced Amazon Prime.

For $79 a year, it offered members unlimited two-day shipping on all orders and overnight shipping for $3.99 more per item. The membership program is designed to encourage those who subscribed to buy more.

The company said subscriptions to the service more than doubled from November to December, but it declined to give specific numbers.

Amazon raised its sales guidance for the fiscal year, forecasting sales between $9.95 billion and $10.5 billion -- up slightly from its previous forecast.

The company's shares closed Tuesday at $35.55, down 24 cents. The stock fell another penny to $35.54 after hours.

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Copyright (c) 2006, The Seattle Times

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AMZN,

Source: The Seattle Times

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