Amazon's Stay Request in Toysrus.com Litigation Denied: Scott Devitt's Takeaways (AMZN)

From Stifel Nicolaus analyst Scott Devitt's note to client's following Amazon's (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 (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.