Amazon.com 2001 Annual Report Download - page 33

We are currently considering prospectively changing our inventory costing method to the first-in first-out
(FIFO) method of accounting which would, if applied, become effective January 1, 2002. We are currently
determining the effect this change would have on our financial statements, whether this change would be
significant, and whether it meets preferability requirements under generally accepted accounting principles. We
believe the change would facilitate our record keeping process, and in turn, our ability to provide fulfillment
services to third-party companies as part of our services offering, and would result in increased consistency with
others in our industry. Although we have not yet completed our analysis of this potential change, based on our
preliminary analysis, we do not anticipate the effect of such change, if applied, to have a significant cumulative
effect on results of operations in the fiscal year of adoption, nor on amounts previously reported as inventory or
“Cost of sales” as if the FIFO method had been applied in previous years.
Gross profit was $799 million, $656 million and $291 million for 2001, 2000 and 1999, respectively,
representing increases of 22% and 126% for 2001 and 2000, respectively. Gross margin was 26%, 24% and 18%
for 2001, 2000 and 1999, respectively. Increases in the absolute dollars of gross profit during each period
corresponds with increases in units sold, improvements in inventory management, and improved product
sourcing. Excluding the results of our Services segment, gross margin would have been 23%, 21% and 17%,
respectively.
Gross profit for our U.S. Books, Music and DVD/video segment was $453 million, $417 million and
$263 million for 2001, 2000 and 1999, respectively, which represents increases of 9% and 59% for 2001 and
2000, respectively. Gross margin was 27%, 25% and 20% for 2001, 2000 and 1999, respectively. Improvements
in gross margins during 2001 correspond with improvements in inventory management, continued improvements
in product sourcing and, to a lesser extent, the higher margin sales of new and used products sold through
Amazon Marketplace, offset by higher customer discounts. Improvements in gross margin during 2000 in
comparison to 1999 reflect improvements in inventory management and product sourcing, and lower customer
discounts offered.
Gross profit for our U.S. Electronics, Tools and Kitchen segment was $78 million and $45 million for 2001
and 2000, respectively, representing an increase of 76% for 2001. This segment reported a gross loss of
$20 million for 1999. Gross margin was 14% and 9% for 2001 and 2000, respectively, and negative 13% during
1999. Improvements in gross profit for each of the comparative periods corresponds with increases in net sales,
improvements in product sourcing, the introduction of new product categories, and improvements in inventory
management. Also, since most online sales of toys and video games, since September 2000, are sold through our
strategic alliance with Toysrus.com, the corresponding gross profit is therefore reported in our Services segment.
Gross profit for our Services segment was $126 million, $116 million and $12 million for 2001, 2000 and
1999, respectively, which represents an increase of 9% for 2001. Since we began offering services in late 1999,
annual growth rate for 2000 is not meaningful. Costs associated with our service revenues classified as cost of
services generally include fulfillment-related costs to ship products on behalf of third-party sellers, costs to
provide customer service, credit card fees and other related costs. Gross margin was 56%, 59% and 93% for
2001, 2000 and 1999, respectively. Gross profit from our Services segment largely corresponds with revenues
from our business-to-business strategic alliances, which includes our Merchant Program and, to the extent
product categories are not also offered by us through our online retail stores, the [email protected]
Program, as well as our strategic alliance with America Online, Inc. Gross profit for our Services segment also
includes amounts earned through Auctions, zShops and Payments, and miscellaneous marketing and promotional
agreements. The decline in gross margin from our Services segment for 2001 relates to service costs classified in
cost of sales resulting from the shift in the mix of our strategic relationships towards alliances that incorporate a
broader range of services, including fulfillment. Also contributing to the decline in Services gross margin was a
reduction in high-margin marketing and promotional agreements. Included in service revenues are equity-based
service revenues of $27 million, $79 million and $7 million for 2001, 2000 and 1999, respectively. Equity-based
service revenues result from private and public securities received by us and amortized into our results of
operations over the period services are performed.
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