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Stock Analyst Update

Losses Keep Increasing at

On Monday, online bookseller  announced an operating loss of $0.19 a share and a net loss of $0.30 a share for the first quarter, in line with Wall Street expectations. Losses as a percentage of sales increased to 56%, from 47% in the fourth quarter. Revenue for the quarter was $78.2 million, a 142% increase from a year ago but a 5% decline from the fourth quarter. This was the first quarter in its brief history that the company's year-on-year revenue growth fell below 200%.

The most alarming number in's results was a decline in gross margin from 22.6% to 19.4%. Company officials attributed the shortfall to an unexpected jump in low-margin music sales, which forced it to turn to third-party distributors. They said that such problems won't happen again once the company's two new distribution centers are in place. Still, a decline in gross margin is a bad sign for any retailer, especially in the cutthroat online world. If can't get that number back above 20% next quarter, it may be in trouble. is inevitably compared to (AMZN), the oldest and biggest online bookseller. But although there are some similarities between the two companies, Monday's conference call highlighted some major differences.

While Amazon has branched out into selling all kinds of things over the Internet, plans to concentrate on books and similar "information" products, such as magazines, music, and videos. Interim chief executive officer Steve Riggio spent a lot of time during the call waxing rhapsodic about the possibilities of e-books, which users download from their computers into a special reading device. In March, successfully tested the technology with a new e-book-only novella by Stephen King, and Riggio said he expects e-books to be the wave of the future.

Another way differs from Amazon is that it has a bricks-and-mortar partner in former parent Barnes & Noble , which still owns 40% of the company. Barnes & Noble has been reluctant to promote in its stores for fear of cannibalizing its sales, a strategy critics have called short-sighted. But Riggio, whose brother Leonard is CEO of Barnes & Noble, has pledged closer cooperation between the two companies. This is a positive development, because there's a growing consensus that a hybrid bricks-and-clicks model has advantages over an Internet-only model.

However, any advantages will be academic if doesn't start paring its losses soon. Its cash hoard of $360 million will keep it afloat for a while, and its relationship with Barnes & Noble means that the clock isn't ticking quite as loudly as it would for a stand-alone e-tailer. Still, this company had better start making larger strides toward profitability in the next few quarters, or it will end up as a footnote in the history of online commerce.