|
BUSINESSWEEK ONLINE: Business Week ebiz | |||||||||||
| |||||||||||
 |  | |
 | |
 |
||||||
Will eToys Keep Celebrating after Christmas? The e-tailer is "trouncing" other cyber toy sellers, and investors may come to appreciate that even more after the holidays Santa Claus makes it look easy, but the truth is that there's nothing more nerve-racking than the toy business at Christmas. With the enormous seasonal jump in sales comes the headache of taking in orders and delivering them. It's standard practice for retail store managers to staff the cash register, wrap gifts, stock shelves, and do whatever else it takes to keep business flowing. A dissatisfied Christmas shopper is most likely a customer lost forever. This year the Internet is making the toy business more frenetic than ever. In 1998, some $80 million worth of toys were sold via the Net. Through Thanksgiving of this year, Web toy sales were already twice that figure, and another $100 million-plus in sales is expected during this holiday season. With growth like that, there are more virtual purveyors of toys than ever. Traditional retailers are nervously watching online sales balloon and searching for strategies to get a piece of the online action. There are now Web sites backed by brick-and-mortar companies (ToysRUS and KBKids), sites on which toys are just one category of goods (Amazon and Wal-Mart), and pure toy e-tailers (SmarterKids.com and Toysmart.com). REASSURANCE. Of all these, e-tailer eToys seems to be entering the Christmas crunch as the consumer favorite. And analysts think that will translate into a strong performance for its stock once the market exhales after Christmas. Right now, eToys (ETYS) is trading in the middle of its 52-week range at 52, because the market tends to sit on the sidelines until Christmas results are in. "The stock price is having a typical seasonal performance," says Lauren Cooks Levitan, a principal at Robertson Stephens and an equity analyst who covers the retail sector. "Investors want significant enough data to assure them that their assessment of the company is right." Most e-tailers have resisted the monthly revenue reporting that is standard for traditional retailers. They only report once a quarter, with no speculating in between, and it may be a while before they migrate to a monthly reporting model. In the meantime, companies such as eToys will have to wait patiently through Christmas for investors to appreciate their performance. eToys' presumed lead is based on various consumer surveys. In October, Robertson Stephens began its Online Shopping Challenge -- a consumer survey of Web shoppers that attracts visitors by raffling off $10,000 worth of Internet shopping to a chosen few. Over the past six weeks, the survey has collected responses from 4,000 consumers about their online shopping habits. So far, customer satisfaction with Web shopping generally is 8.45 on a scale of 10. eToys, the site respondents mention second most often in the survey after Amazon, has the top rating -- a 9.39 out of 10. ROLLING UP THEIR SLEEVES. "It's trouncing the competition," says analyst Levitan. "We assume that its being one of the most reported sites in the survey is some indication of traffic. We think the customer satisfaction rating will translate into customer retention. Sites with a lower rating won't retain the visitors they have." Puffing to catch up are toy store KBKids at 7.85, Internet toy store SmarterKids.com at 7.56, and the Web rendition of ToysRUs at 7.0. ToysRUs does no better in a survey of Internet toy sites by Gomez Advisors. It ranks seventh in that ranking, with a 6.83 score on a scale of 10. eToys ranks No. 1, with a score of 8.17. In short, eToys is so far ahead that the only thing that might derail it would be an order-processing meltdown. It contracts out the bulk of its fulfillment to Fingerhut, which recently put out a call to executives at parent Federated Department Stores to help get orders into the mail for Christmas. While the image of managers rolling up their sleeves to stuff toys in boxes may alarm consumers, this has been happening at walk-in stores for years. "We're not worried about Fingerhut," says eToys Chief Financial Officer Steve Schoch. "In the facilities we own, corporate employees are put into just about every function in peak periods. To the extent [Fingerhut] needs to do it, it doesn't look unusual." There are reports that Fingerhut's St. Cloud (Minn.) facility has been overtaxed by 70% growth in orders over the past couple of weeks, but the eToys contract calls for the Minneapolis-based distributor to route excess orders through another facility. Some analysts point to this kind of fulfillment -- where products go straight from the manufacturer to a shipping operation without being logged into a real warehouse -- as a weakness of the Net. But others note that inventory shortages at peak selling times are a problem for traditional retailers, too. The holidays are the most important time of the year for all toy retailers, but even more so for Web toy stores. After eToys' relaunch of its site in October, 1998, it turned in post-Thanksgiving-to-Christmas sales of $23 million -- the bulk of its $30 million in sales for the year. For the fiscal year ending next March, its sales are expected to grow 350% to 400% -- and the lion's share of that is going to come this quarter. Analysts say that e-shopping does so well during the holidays because consumers hate crowded stores. The downside is that returning items isn't easy over the Web -- and that a site whose shopping experience is poor is only one click from oblivion. GOING GLOBAL. On an e-commerce site, in fact, the difference between success and failure can boil down to technology. "We have systems architects who know how to build our Web site to handle the seasonal volumes we get," says Schoch. "That kind of capability is harder to come by for a brick-and-mortar company with legacy systems and a corporate technology department." In fact, eToys' increasingly popular brand is in many ways a triumph of technology. Schoch says that the eToys site is designed so that kids can use it -- and so parents don't have to worry that their children will run into unsuitable material, as they might in Amazon's video section. Shoppers can screen products by age group. "Click a button, and it's a 4-year-old's Web site," brags Schoch. On the increasing strength of its brand, eToys has started to go global. Its British Web site is now in its first Christmas season. Plans are to expand to another European country at some point, although the company isn't talking about where or when because it doesn't want to telegraph its strategy to competitors. And there's still plenty of opportunity at home. "We are in seven product categories," says Schoch. "Video games, toys, baby products, books, home videos, educational software, and music. Those account for about half of the $100 billion U.S. children's market, so we've got plenty of room to grow." That doesn't mean that eToys will be profitable anytime soon. Levitan is predicting a loss for the current fiscal year of about $160 million, equal to $1.34 a share, on revenues of $120.8 million. That compares with a 27 cents-per-share loss last year. "They are ramping up their investment to gain market share," says Levitan, who doesn't expect to see profits from eToys until March, 2003. "I think it's an appropriate strategy, particularly as the market is giving these [Internet] stocks the leeway to grow their businesses." At last count eToys had 611,000 repeat customers, one-third more than it had in March. If this trend continues until Christmas, it may have more to celebrate come January than the arrival of the new millennium. Popper covers investing and small-business topics for Business Week Online. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
| |
 | |
 WEB POINTERS To visit some of the sites mentioned in the story, click here: eToys ToysRUS.com KBKids.com Amazon Wal-Mart Toysmart.com Robertson Stephens Gomez Advisors | ||||||
