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But his Net fashion business is hanging by a thread. At the end of the third quarter, Bluefly's coffers were down to $906,000 in cash. With a make-or-break Christmas looming, the company didn't have even half the amount on hand that it spends on ads in a typical quarter. Sure, sales had reached $3.2 million during the period, for an impressive 272% increase over the third quarter of 1999. But the cost of those sales had risen by an even higher 299%, to $2.6 million. In the summer, Bluefly (BFLY) hired Credit Suisse First Boston to help it find other sources of funding, possibly an acquisition by an established retailer. "They explored every option," says Seiff, but came up empty-handed. The situation was desperate. Enter George Soros. That's right, one of the world's best-known hedge-fund managers. Quantum Industrial Holdings, a part of Soros Private Funds Management, chipped in $5 million in October to tide Bluefly over the all-important Christmas season. It also committed to pumping in $10 million more next year. By then, the Soros investment in Bluefly could reach $39 million. That would still be less than 5% of QIH's portfolio, but it would give the currency- and bond-trading king control of the online retailer. UNPREDICTABLE Why would he want it? Soros fund managers wouldn't comment publicly. With a rights issue pending, they fear a possible sanction by the Securities & Exchange Commission for touting the stock. But some industry analysts wonder, only half jokingly, whether Soros might possibly have confused his charity and investment portfolios after the recent reorganization of his hedge fund. "Soros is throwing good money after bad," says Thomas Wyman, an analyst with J.P. Morgan. Others suggest Bluefly is trying to stay aloft long enough to become an attractive takeover target. "They'd be better off with a brick-and-mortar partner," says Heather Dougherty, an analyst with Jupiter Research. Analysts are skeptical about Bluefly's prospects because the company is in one of the toughest sectors of online retailing. It's not easy to sell clothes on the Net, where customers can't try them on or touch the fabric. It's even harder for a startup like Bluefly, which doesn't have retail outlets or name recognition. That's not the least of it. Bluefly is in a segment of the apparel market that's even harder to transfer to the Web: designer closeouts. Inventory is inconsistent and unpredictable. You might be able to find a Donna Karan sweater in large, but do you really want purple? And the online seller can't use designers' names in its advertising. When it features a Calvin Klein caviar dish in one print ad, it simply says "designer" caviar dish. "You have to stay under the radar screen with closeouts," says Seiff. SOME ADMIRERS. Despite the challenges, Seiff and his backers say this is a Web niche that Bluefly can fill, given time. "There's no one out there doing exactly what they're doing. That's one reason they were able to get funding when others weren't," says Spencer Hart, a director at CSFB. "With this round of financing, they're prepared to continue to execute their business strategy, which has been performing well." Seiff, who has manned customer-service lines himself during crunch times, has watched his company grow from 6 people and 100 orders a day two years ago to a staff of 90 and 5,000 orders on peak December days. With Internet research firms like Jupiter Media Metrix and Forrester Research predicting up to a 60% increase in online sales this year, this is no time to turn back, he maintains. For Bluefly, it's full speed ahead with advertising and fulfillment. With $5 million in fresh capital, Seiff says the company is scrambling to place $2 million worth of ads. It has moved its fulfillment operations to a larger facility at National Catalog Corp. in Virginia. Another improvement over last year: Customers receive e-mails with order-tracking numbers when their purchases are shipped. Money problems aren't new to Bluefly's founder. Seiff entered the rag trade in 1991 with a company called Pivot Rules, which sold golf clothes to high-end department stores. But as that market grew crowded, Pivot in 1996 went downmarket to sell to discount stores. A year later, it listed on the Nasdaq small-cap market, raising $7.5 million in an initial public offering. But the prospectus for the offer warned: "Historically, the company has been undercapitalized." OUT OF STYLE. By early 1998, it was clear the new strategy wasn't working. And Seiff launched Bluefly, which took over Pivot Rules' listing. The stock was trading at $1.81 on Nov. 13, down from nearly $21 at its peak in December, 1998, when it announced a link to Yahoo! A jolly Christmas could help turn that around. Or it could open up other survival possibilities. "The opportunity here will be for TJX, which does this offline, to acquire Bluefly," says Jupiter's Dougherty. (TJX runs discount stores T.J. Maxx and Marshalls.) That way, Bluefly could count on more reliable inventory. And the Soros fund might get more of its money back. Faith Keenan covers ebiz for Business Week in New York. |
