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Amazon shares hit record as high-margin businesses fuel holiday profit

A worker lifts a box at Amazon’s warehouse in Dunfermline, Scotland.The warehouse covers more than one million square feet, about the size of 14 soccer pitches.

© Russell Cheyne/Reuters Inc. shares hit a new record on Tuesday after it reported better-than-expected quarterly profit, fuelled by the growth of higher-margin businesses during the fiercely competitive holiday quarter.

The world's largest Internet retailer said that its cloud computing services, video content sales and its aggressive expansion in e-books helped increase profitability.

In addition, a growing network of warehouses or fulfillment centres closer to customers held down shipping costs as it vied with Wal-Mart Stores Inc. and other major retailers for consumer dollars over the holidays.

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Chief executive officer Jeff Bezos highlighted the Kindle's e-book business, calling it a multi-billion dollar category that grew about 70 per cent in 2012. Its traditional physical book business rose about 5 per cent in the same period, he noted.

"We're now seeing the transition we've been expecting," Mr. Bezos said in the company's results statement.

Profits have shrunk in recent years as the company invested for longer-term growth, building massive fulfillment centers, developing a Kindle Fire tablet hardware business in competition with Apple Inc., and expanding into Internet-based cloud services.

The fourth-quarter profit results suggested that Amazon may be able to generate attractive returns from such spending, analysts said.

"The fourth-quarter operating income was up more than expected," said R.J. Hottovy, an equity analyst at Morningstar. "This supports the bull case that Amazon can monetize its growth over the longer term."

The Seattle-based company said operating income jumped 56 per cent to $405-million (U.S.) in the fourth quarter, compared with $260-million in the fourth quarter of 2011.

Amazon's stock climbed 11 per cent to $288 in after-hours trading. It hit a regular-session record of $284.72 on Jan. 25.

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The company also said fourth-quarter revenue rose 22 per cent to $21.27-billion as it grabbed a big share of online spending during the holidays. But it was the profit that initially caught Wall Street's eye.

"It was a much better-than-expected gross margin, a strong forward indicator to drive margin expansion. What is really important is gross profit dollars and that line is stronger," said Ken Sena at Evercore Partners.

The gross profit margins were 24 per cent in the fourth quarter, compared with Wall Street expectations of about 22 per cent.

"Incredibly strong margins," said Jordan Rohan, an analyst at Stifel Nicolaus. Amazon generated the highest quarterly gross margin in its North America business in more than three years, he noted.

Amazon mainly operates as a retailer, buying products at wholesale prices, storing them and then selling at a slight mark-up to consumers online.

But the company has expanded into other businesses that are potentially more profitable, including cloud computing, digital content and acting as an online marketplace for other merchants.

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These newer businesses are growing faster than the company's original retail operations, boosting profitability.

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