Kindle Fire Returns Could Hit Amazon's Earnings

Dec. 7.11 | About:, Inc. (AMZN)
As we have seen from both the media reviews and the user reviews, the Kindle Fire has a number of flaws, possibly because of having been somewhat rushed to market to still make the holiday season.

In spite of these flaws, and mostly because of the low $199 price, the Kindle Fire is selling strongly, with iSuppli estimating the sale of 3.9 million units in Q4 2011. This is broadly in line with recent analyst estimates of 4 million units sold in the quarter, even if below the 6 million bandied by Displaysearch. 3.9 million units is still a lot of units, which brings us to another problem: Returns.

Many of the flaws we uncovered earlier have been confirmed, both by experts and in’s own forum and reviews. Several of these flaws were serious enough to prompt the returning of the device. In's user reviews, even with the much larger number of reviews - now over 4,000 - the distribution still has the same fairly high incidence of 1- to 3-star reviews, with 1-star reviewers mostly stating that they’ll return the device, and with up to 3 stars there are still some users saying the same.

Given these developments, it seems very probable that will face a material percentage of returned devices. We can speculate that unsatisfied customers are more likely to review and rate the device poorly, but it doesn’t seem outside the realm of possibility that between 7.5% and 15% of these devices might find their way back to Amazon. Since shipments are estimated at 3.9 million devices, that comes to between 292,500 and 585,000 Kindle Fires being returned.
What about the earnings impact?

Although 3.9 million Kindle Fires seem a lot, even at full price they come to just $776.1 million, which would represent less than 4.3% of’s estimated revenues for Q4 2011. By taking into account 461 million diluted shares, and considering a loss per returned Kindle of between 20% and 40% of its sales price, we come to the following table showing the losses and EPS impact the estimated returns could have:
Having rushed the Kindle Fire into the market might have made the second player in the tablet market, but it will have an additional negative earnings impact because of returned devices, which we estimate at $0.03 to $0.10 per share.
This can’t help, with estimates already having been lowered from $0.86 to $0.21 for Q4 2011 in just the last 90 days. This earnings impact might, however, be spread between Q4 2011 and Q1 2012. I also would like to remind that I find it likely that will be showing losses as early as Q1 2012, mostly due to less favorable seasonality on top of its margin implosion.

Disclosure: I am short AMZN.