How much should spend to run its business? The online retailer yesterday reported $2.5 billion in fourth-quarter sales, a...

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How much should spend to run its business?

The online retailer yesterday reported $2.5 billion in fourth-quarter sales, a 30.6 percent surge compared with the year-earlier period.

Customers picked more from its virtual shelves during the holidays, but Wall Street had another concern: Why didn’t more of those hefty sales dollars trickle to the bottom line.

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Amazon’s fourth-quarter profit was $346.7 million, or 85 cents a share. Excluding a $244 million tax benefit and certain expenses, it earned $149 million, or 35 cents a share, 5 cents below Wall Street expectations.

That missed target — coupled with news that it would shrink profits further this year by investing more in technology and marketing — sent the company’s stock tumbling 14.6 percent today.

“There’s a cost related with a lot of things they are doing,” said McAdams Wright Ragen analyst Dan Geiman, referring to Amazon’s free-shipping promotion and other programs designed to benefit customers. “Presumably they will pay off somewhere down the road.”

Three years ago, Amazon revived sales growth by adopting the strategy of retailers such as Costco and Wal-Mart: to deeply discount items and make money by selling a higher volume of goods.

The company coupled lowers prices with free shipping on orders over $25. While both helped spur sales, analysts question how much more these investments will chip at profit.

Chief Executive Jeff Bezos told analysts yesterday all the company’s investments take time to have a meaningful impact. He used the example of Amazon’s electronics sales, which surpassed book sales during the four days of Thanksgiving weekend, at a time when book sales set its own record.

Amazon announced another program yesterday, one that would cost money in the short term.

It introduced its first membership program, “Amazon Prime.” For a flat fee of $79 a year, members receive unlimited two-day shipping on orders, and overnight shipping for $3.99 per item. The account may be shared with up to four family members.

For all of 2004, Amazon earned $588 million, or $1.39 a share, on sales of $6.92 billion.

The company yesterday raised its full-year sales expectations to between $8.05 billion and $8.65 billion, an increase of 16 to 25 percent. But it maintained guidance for operating profit, at $385 million to $510 million, a growth rate of 13 to 16 percent.

Amazon has a competitive advantage, Geiman said, but the competition is getting sharper.

“Amazon is not operating in a vacuum,” he said. “They have to do some things themselves to enhance their offering and keep customers coming back.”

Amazon’s shares today fell $6.13 to close at $35.75.

Monica Soto Ouchi: 206-515-5632 or