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scott devittFrom Stifel Nicolaus analyst Scott Devitt's note to client's following Amazon's (NASDAQ:AMZN) announcement last week that the Appellate Division of the New Jersey Superior Court has denied their motion to the Toys termination pending a decision on its appeal:

  • This allows Toys to transition its business to GSI Commerce (NASDAQ:GSIC) and Exel on July 1 without a decision being made on the appeal. No date has been given as to when the appeal will be heard and resolved.
  • We believe Amazon's appeal is monetary in nature, an attempt to receive payment from Toys for work rendered. Amazon continues to believe it will win its appeal.
  • Amazon reiterated that its operating profit could be impacted by as much as $25 million in 2Q06 and $50 million in 2006, the majority of which is related to the fees Toys pays on the existing relationship. Even if Amazon wins the appeal and receives a payment from Toys to end the agreement, the amount of profit that needs to be replaced on an ongoing basis is the $50 million fee that Toys historically paid. We believe, as an alternative to Toys, Amazon may offer its own inventory as well as another third-party toy vendor. We think the $50 million will be difficult to replace as the Toys deal was cut in 2000, when pricing for Internet partnerships was higher than it is today. $50 million equates to 8.5% of our 2006 operating income estimate.
  • We continue to be favorable on Amazon's business and its digital strategy, which is in continuous rollout throughout 2006. We would recommend that investors stay on the sidelines until the long-term impact of the Toys deal from a profitabilty standpoint is disclosed.
  • Source: Amazon's Stay Request in Toysrus.com Litigation Denied: Scott Devitt's Takeaways (AMZN)