Amazon.com 2002 Annual Report Download - page 35

commissions, fees and other amounts earned from our services business, including our Merchant.com
program (such as www.target.com), and to the extent full product categories are not also oÅered by us
through our online retail stores, our Merchants@ program, such as our apparel store, the Toysrus.com and
Babiesrus.com stores, and portions of the Target store at www.amazon.com, as well as our commercial
agreement with America Online, Inc. This segment also includes Auctions, zShops, Amazon Payments
and miscellaneous marketing and promotional agreements. The increase in net sales from our Services
segment results from amounts earned through our Merchants@ program and our Merchant.com program,
oÅset by the expiration of certain of our marketing and promotional agreements. The amount of
compensation we receive under certain of these services agreements is dependent on the volume of sales
that the other company makes. See Item 1 of Part I ""Business Ì Additional Factors That May AÅect
Future Results Ì Our Business Could SuÅer If We Are Unsuccessful in Making, Integrating and
Maintaining Commercial Agreements, Strategic Alliances and Other Business Relationships.''
Shipping revenue (which consists of outbound shipping charges to our customers) across all operating
segments was $365 million, $357 million and $339 million for 2002, 2001 and 2000, respectively. Shipping
revenue does not include any commissions or other amounts earned from Amazon Marketplace. In
January 2002, we introduced a new shipping option at www.amazon.com, oÅering everyday free shipping
for certain orders that exceed a speciÑed amount, and we lowered this threshold several times throughout
the year. We oÅer similar shipping options for our internationally-focused Web sites and may oÅer other
free or reduced-fee shipping options over time. These shipping oÅers reduce shipping revenue as a
percentage of sales and cause our gross margins on retail sales to decline. We view these shipping oÅers as
an eÅective marketing tool.
First quarter of 2003 net sales are expected to be between $1.025 billion and $1.075 billion, or grow
between 21% and 27%. For the full year 2003, net sales are expected to grow over 15%. However, any
such projections are subject to substantial uncertainty. See Item 1 of Part 1, ""Business Ì Additional
Factors That May AÅect Future Results.''
Gross ProÑt
Gross proÑt is net sales less the cost of sales, which consists of the purchase price of consumer
products sold by us, inbound and outbound shipping charges to us, packaging supplies and certain costs
associated with our service revenues. Costs associated with our Services segment revenues and classiÑed as
cost of services generally include fulÑllment-related costs to ship products on behalf of third-party sellers,
costs to provide customer service, credit card fees and other related costs.
EÅective January 1, 2002, we prospectively changed our inventory costing method to the Ñrst-in Ñrst-
out (""FIFO'') method of accounting. This change resulted in a cumulative increase in product inventory
of $0.8 million, with a corresponding amount recorded to ""Cumulative eÅect of change in accounting
principle'' on the statements of operations in 2002. We evaluated the eÅect of the change on each quarter
during 2001 and determined such eÅect to be less than $1.2 million individually and in the aggregate. We
determined this change to be preferable under accounting principles generally accepted in the United
States since, among other reasons, it facilitates our record keeping process, signiÑcantly improves our
ability to provide cost-eÇcient fulÑllment services to other companies as part of our services oÅering and
results in increased consistency with others in our industry.
Gross proÑt was $993 million, $799 million and $656 million for 2002, 2001 and 2000, respectively,
representing increases of 24% and 22% for 2002 and 2001, respectively. Gross margin was 25%, 26% and
24% for 2002, 2001 and 2000, respectively. Increases in gross proÑt in 2002 primarily correspond with
increases in units sold (including increased product sales through Amazon Marketplace), improvements in
transportation and inventory management and improvements in product sourcing, oÅset by price reductions
on books and electronics, the expiration of certain high-margin marketing and promotional agreements,
and our free and reduced-rate shipping oÅers. Increases in gross proÑt in 2001 primarily correspond with
improvements in inventory management and product sourcing, and to a lesser extent, increased product
sales through Amazon Marketplace. Our overall gross margins Öuctuate based on several factors, including
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