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STREET WISE By Margaret Popper January 13, 2000 Why Aren't Web Toy Stocks Playing Well with Investors? Two of these e-tailers -- eToys and SmarterKids -- are getting punished by the market despite solid holiday performances and real value For toy e-tailers, 1999 will go down in history as the year consumers got it. In the week ended Dec. 5, visits to toy sites shot up 42% from a week earlier and 68%, vs. a year earlier, according to Media Metrix. Through the holiday season, the Big Three toy sites -- eToys, Toysrus, and KBKids -- stayed in the top 10 of all sites as measured by unique visitors. "The Internet has proved to be a satisfying channel for toy buyers," says Liz Leonard, an analyst at Web consumer analysis firm Gomez Advisors. Why is it, then, that Web toy stocks are doing so poorly? The simplest answer is that there doesn't seem to be a way to please the market when it comes to toys. Take a look at two toy e-tailers with strategies at opposite ends of the spectrum: eToys (ETYS) -- the toy e-tailer that aims to be all things to all people -- and SmarterKids.com (SKDS), a gourmet toy site focused on education, plus fanatical attention to customer service. The market is punishing the one for being too big and the other for being too small, and in the meantime may be overlooking some real value. Before Christmas, market watchers were betting on eToys to do wondrous things -- depending on its ability to fulfill orders. Oops. eToys made good on 90% of its deliveries, but at Christmas, when the product is toys, a 10% miss is a big one. Lauren Cooks Levitan, a principal equity analyst at Robertson Stephens and one of eToys' staunchest supporters early on, eventually downgraded its stock. So eToys' shares are now shuffling along at around 22 -- the bottom of their post-IPO range.   If you consider the site's huge traffic, eToys' 90% success rate in fulfillment doesn't seem bad   Even with the holiday glitches, the story at eToys is good. "eToys will continue to garner a commanding share of the market both in the U.S. and internationally," says Wit Capital analyst Ryan Alexander. "The fulfillment infrastructure performed perfectly well over the holidays." What he means is that when you consider the site's holiday traffic, a 90% fulfillment record starts to look at least O.K. The eToys site had nearly 2 million visitors between Nov. 22 and Dec. 19. It ranked third behind Amazon and eBay for site visits during that period, according to Media Metrix. And if 90% of those customers were satisfied, eToys still has an impressive franchise. Alexander believes that the stock is attractive at its current price. He's predicting that revenues will total $129 million for 1999, and jump to $256 million next year. He also sees eToys' losses increasing from $164 million in 1999 to $197 million in 2000. But in tune with the current dot.com refrain, the company is more interested in market share than profits. In fact, eToys spent $45 million on advertising last year, and it may have to spend at least that much in 2000. That's because time's running out for toy e-tailers to grab market share. There's probably a window of a year or so until brick-and-mortar companies get their Internet acts together, says analyst Seema Williams of Forrester Research. "They had some fulfillment issues this holiday season, but Toysrus and Wal-Mart have a year to get smarter." So if the market hates eToys for its order screwups, SmarterKids.com must be going gangbusters after delivering on 99% of its orders by Christmas. Oops. At 7 13/16, its stock is less than 2 above its all-time low since the company's late-November IPO. Initially, analysts said that a niche strategy -- educational toys -- wouldn't work. Never mind that SmarterKids is developing a loyal customer base with an upscale demographic most e-tailers would die for. "EDUCATION IS STILL BORING." Among SmarterKids' strengths is its approach to personalization. Of the site's 150,000 to 160,000 return customers, 100,000 have submitted profiles of their kids. If you aren't sure how to describe your child's learning style, the site uses a questionnaire to help you determine it. You can e-mail a team of educational experts with specific child-rearing questions. The focus on education is unequivocal: Only about 20% of the items on the site are mass market -- and there are no Pokemon cards or Beanie Babies -- which may be one of SmarterKids.com's problems. "Education is still boring, even if it is deliverable," observes Forrester's Williams. Still, "we believe SmarterKids has a neat technology and is providing content that people believe in," says Peter Kris, president of Van Wagoner funds. Certainly, CEO David Blohm has a much broader vision than just toys. He talks of developing programs "to help parents help their kids online. That could include tutoring, homework, and distance learning."   SmarterKids' focus on what is important for parents has impressed Hambrecht & Quist's Odening   The potential for these kinds of services, and SmarterKids' focus on what is important for parents, makes Hambrecht & Quist analyst Gerald Odening think the stock is worth $21 a share. He's predicting revenues of $40 million for this year and a loss of $39 million, vs. an estimated loss of $181 million in 1999. "They've done a great job picking up new accounts -- they probably did $4.3 million in sales in December," he says. Granted, SmarterKids spent $18.5 million on sales and marketing in the fourth quarter. But its customer base tends to shop all year round, so its sales don't balloon in December, as competitors' do. Whether you prefer the more cyclical but high-volume eToys strategy, or the carefully targeted, higher-price strategy of SmarterKids.com, there's still plenty of untapped value in the toy e-tailing sector. "We don't judge stocks on their market valuation, we judge them on fundamentals," says Van Wagoner's Kris. "Both of these companies are fundamentally terrific." Maybe in all the holiday hype, the market has overlooked that. Popper covers investing and small-business topics for Business Week Online. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					WEB POINTERS To visit some of the sites mentioned in the story, click here: eToys SmarterKids Toysrus KBKids Robertson Stephens Wit Capital Forrester Research Hambrecht & Quist Media Metrix Gomez Advisors