BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESS WEEK E.BIZ -- NET WORTH

It Ain't Over 'til It's Over
The shorts are betting against it, but this is one e-tailer that may survive

It's tough to keep up with all the Internet retailers biting the dust these days. Just over the past few weeks, we've seen the disappearance of beauty goods store Eve.com, teen site Kibu, and luxury goods e-tailer Miadora. Short-sellers are betting that one of the next to fall may be a company called Global Sports Inc. ( GSPT), which has its fortunes linked to e-commerce. About 1.8 million shares of the company's stock have been sold short, according to the National Association of Securities Dealers. That's an astonishing 68 times the average daily trading volume in the stock. Compare that with a mere five days of short interest for e-tail punching bag Amazon.com Inc. ( AMZN) and less than a day for the much-maligned Priceline.com ( PCLN).

But short-sellers may be betting on the wrong company going belly-up. Although it's dependent on electronic commerce, Global Sports isn't one of the let's-spend-everything-we-have-on-TV-advertising dot-coms. Rather, it's a new model of what e-tailers can do to make money. Global Sports builds and runs the e-commerce sites for other, better-known companies, such as Athlete's Foot, Sports Authority ( TSA), and BlueLight.com, the online arm of Kmart ( KM). The companies with the established brand names do the marketing, and Global Sports takes care of managing their Web sites.

Here's an example. Last year, Global Sports struck a deal with Athlete's Foot to take care of the Atlanta retailer's Web site. Global Sports designs the site, buys the inventory, stores the goods in its own warehouse, and is responsible for shipping products to customers. Athlete's Foot markets the site, sets the prices online, and advises on design so that Web pages fit with the company's image. The two companies split the revenues generated from the site. Typically, Global Sports gets 92.5% of a sale and its partners 7.5%. ''We're very happy,'' says Robert J. Corliss, CEO at Athlete's Foot Group Inc. ''We felt that we didn't have the resident expertise [to build our own Web site].''

Sure, talk is cheap. And Global Sports' financials don't look much better than those of Net companies that have hit the dust heap. It's on track to lose about $55 million this year, on revenues of $42 million, according to analyst Lauren Cooks Levitan of Robertson Stephens. It only has about $32 million in cash on its balance sheet and was burning through some $5 million a month at last count. Its stock has gotten pounded along with the rest of the dot-com detritus. As high as $25 a year ago, shares dropped to $5 this summer before recovering to their current $8.

But once you start tearing apart the company's financials, its future begins to look a lot brighter. For starters, although it hasn't shown up on the balance sheet yet, the company is getting the cash it needs to keep going. Cable company Comcast Corp. ( CMCSA) and shopping channel QVC Inc. have agreed to invest $40.8 million in exchange for stock in the company. Global Sports also is paying about $38 million in stock to buy Fogdog Inc. ( FOGD), a dying online sporting-goods retailer that had $42.5 million in cash at the end of September. All told, Global Sports has about $100 million in cash to keep funding its operations.

Of course, all the cash in the world won't save a money losing company. But it looks as if Global Sports could turn profitable by mid-2002. The company, which just started in e-commerce last year, hit revenues of $9 million in the third quarter, topping analysts' expectations of $8 million. And its gross margins were a healthy 30%, up from 29% in the second quarter. By comparison, Amazon's margins are about 25% and those for sporting goods retailers range between 25% and 30%.

Another pitfall for most online retailers is marketing. They have to spend buckets on advertising and other promotions to get people to their sites. Not Global Sports. Athlete's Foot and other partners spend most of the money for promoting their own Web sites. That allowed Global Sports to decrease sales and marketing expenses from $9.5 million in the second quarter to $8.6 million in the third quarter, even though revenues increased 16% sequentially. If that trend holds and Global Sports can crank up revenues, profits are realistic.

Revenues certainly look as if they are headed north, too. So far, Global Sports has signed alliances with 13 partners. That includes four in the third quarter--Net superstore Buy.com ( BUYC), toy site Toysrus.com ( TOY), the online arm of QVC, and FoxSports.com. FoxSports.com didn't want to get into e-tailing, but now that it has partnered with Global Sports, it's seeing many of the people who come to its site for news also buy sporting goods. ''It's perfect for us,'' says Danny Greenberg, senior vice-president at the Fox site. ''We don't do anything but promote it, and we get a check every month.'' Levitan predicts that revenues will more than double, to $100 million, next year and will hit $175 million in 2002.

The economies of scale can be tremendous. Global Sports spreads the costs of Web design, inventory, and warehousing across all its partners. That's the reason the company was able to decrease its inventory in the third quarter by 3%, to $14.9 million, even though it had a bump in sales.

There's something else I'd like to see in other dot-coms, if I were investing--which of course I'm not, since I've chosen the glamorous life of journalism. Michael G. Rubin, the company's 28-year-old CEO, has been spending cash out of his own pocket to buy Global Sports stock. Since the beginning of August, he has doled out more than $200,000 for about 25,000 shares. ''I believe in the company,'' he says.

Short-sellers often can be leading indicators of companies headed for trouble. They're probably right in predicting rough times ahead for pet supply site Pets.com and online jeweler Ashford.com Inc. But Global Sports? I'm betting Rubin and his partners are going to be around for the long haul.

By PETER ELSTROM, peter_elstrom@ebiz.businessweek.com

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