Ravi Suria painted the picture of company growing money. The only triple-digit growth that mattered, he argued, was in Amazon's cash-flow losses. The report shook many remaining stalwarts, and the stock dropped 19% in one day. Suria addressed Wall Street's darkest fears, that the business model on which Amazon--and for that matter, most e-tailers--is based may be flawed. Arguing that excessive debt and poor inventory management will make Amazon's operating cash-flow situation worse the more it sells, Suria suggested that cash was being devoured at such a rate that the company might eventually find it difficult to meet its obligations by the end of the first quarter next year.
Suria's report got Wall Street's attention because it had the audacity to evaluate this icon of the New Economy as a traditional retailer. Up until Suria, Amazon was usually viewed under a rose-colored microscope that overlooked divergence by dot-coms from standard business measures. Suria's reasoning was simple: Because Amazon has built up a vast infrastructure of warehouse and distribution centers to house burgeoning inventories of product lines, relies on brand-name identification, and needs to spend relentlessly to attract each dollar of sales, it faces many of the same difficulties managing its business as old-line retailers do.
Ironically, a key contributor to this first-quarter debacle was Amazon's efforts to implement its strategy for growth. By adding product lines such as electronics and toys, and building distribution centers all over the country, the job of policing its inventories became much more difficult, particularly for a retailer that concedes it is lacking in retail experience. On $676 million in sales in the fourth quarter, Amazon was forced to take a $39 million writedown on inventory.
Suria and other critics also point out that Amazon's ability to turn over its inventory rapidly enough has declined since the end of...