Businessweek Archives

E Tail Shares: Shop With Caution


BusinessWeek Investor: Stocks

E-tail Shares: Shop with Caution

Time is short for many dot-coms, but not all

Retailers live and die by fashion trends, and these days a lot of Internet stores are suddenly out of fashion with investors. More than a few e-tailers, in fact, appear to be on the closeout rack. "They're sooo 1999," says Seema Williams, an online retail analyst with Forrester Research.

As measured by Robertson Stephens' eTaildex, an e-commerce index, the group has lost 56% of its value since its peak in late November. Some stocks are down 80% to 90%. But you'd better be careful if you're looking to pick up Web stores on the cheap. Many beaten-down dot-com retailers are cheap for good reason. Most are unprofitable, and since Nasdaq peaked out in March, no longer can these Web shops count on limitless funding from financial markets so they can fritter away millions of dollars attracting new customers. Many e-tailers, their backs to the wall, will now have to merge, join with traditional brick-and-mortar stores, or even be acquired by them. The rest? In the trash. "In a Darwinian market, the flip side of survival of the fit is the demise of the weak," says Daniel Ries, an analyst with C.E. Unterberg Towbin in New York. "The market is in the process of weeding the weak out."

The shakeout could get even messier if the economy continues to slow and retail sales, soft for the past two months, weaken further. Says Williams: "Only a handful of dot-com retailers are going to make it."

Although only about 2%, or $40 billion, of America's retail sales are expected to take place on the Web this year, Forrester Research forecasts that share to balloon to 7%, or $184 billion, in 2004. Who will be around to profit? Most likely the sites with major brand identities--Amazon.com, eBay, and priceline.com among them. Some others that might survive include Alloy Online, an Internet destination for teens and young adults; Outpost.com, an electronics outlet; and 1-800-Contacts, a seller of contact lenses that started out in phone marketing and later moved to the Web.

For others, money is fast running out. Boo.com, a splashy international online clothing retailer, shut its virtual shop last month and sold its name and Internet address to Fashionmall.com. Lauren Cooks Levitan, an analyst with Robertson Stephens in San Francisco, reckons that Buy.com, the self-proclaimed "Internet superstore," may run through its $130 million stash in the next year trying to attract customers. Toysmart.com also threw in the towel in May, and ToyTime is considering liquidation. Bluefly.com, a small seller of women's fashions, says it has already spent 40% of a $15 million loan it got in March from one of George Soros' private equity funds. It now hopes Credit Suisse First Boston can find some more money. CDnow, an online music merchant, doesn't know if anyone will buy it before its cash runs out.

One that gained a reprieve, at least for now, is eToys. Billed as the Toys `R' Us of the Net last holiday season, the e-tailer looked likely to run out of cash by yearend--until it raised $100 million in a private placement in mid-June. But analysts doubt it will live up to its initial hype. The stock, at $5.41, is 94% off its October high of $86.

Even mergers might not help. Look at Pets.com, whose quirky TV ads feature a wisecracking canine puppet. The online pet store has snapped up its cyber-rival, privately-owned Petstore.com, in exchange for stock. That gives Pets.com more customers, plus partnerships with Safeway supermarkets and Discovery Communications' TV channels. But investors aren't convinced. Pets.com, which went public last February, now trades at $2.22, down 76% from its March high.AROUND THE CORNER. Such New Economy ventures are finding they've got to act more like traditional retailers. For every dollar consumers spend online, they spend eight more offline as a result of an online search, says Ken Cassar, e-tail analyst at Jupiter Communications. So e-tailers will have to sell through stores or catalogs, as well as Web sites. "EToys may help me figure out which talking doll I should buy for my niece, but I'll likely make the purchase at the Toys `R' Us store around the corner," he says.

Companies with outlets besides Internet sites have an edge. For instance, 1-800-Contacts has its original telephone-order business--and is profitable. It's expected to earn $1.34 a share this year. At $45, its shares sell at 33.6 times this year's estimated net. "Selling over the Internet was a logical extension for them," says Rainerio Reyes, who calls 1-800-Contacts his favorite stock in his $100 million RS MicroCap Growth Fund. A top pick of Unterberg Towbin's Ries is Outpost.com, a low-cost electronics retailer that also runs Web sites for Brookstone, Wolf Camera, and Tweeter Home Entertainment. Ries expects Outpost.com to break even in 15 months.

Robertson Stephens' Cooks Levitan favors Alloy Online, which caters to Gen Y shoppers via catalogs and the Web. It has cash, including a $55 million infusion from Liberty Media subsidiary Liberty Digital, which invests in interactive TV and Internet businesses. Alloy Online expects to break even in the fourth quarter.

As for "pure" e-tailers, the same names keep cropping up on analysts' lists: Amazon.com, eBay, and priceline.com. Each of these has figured out a unique way to sell in cyberspace. And each has enough cash to stick around. At the end of March, eBay had $900 million in cash, and priceline.com had $150 million. While Amazon isn't projected to be in the black until 2002, its cash pile is $1.2 billion.

Amazon, eBay, and priceline.com also have what the Street calls "platform," New Economy-speak for an approach that will support major expansion. At eBay, the platform is a worldwide bazaar where buyers and sellers meet in cyberspace. priceline.com's is name-your-price shopping for high-demand commodities and services. Amazon's is a highly efficient system of taking orders and delivering products to your door. "These are the true game-changers," Cooks Levitan says.

Moving beyond kitsch and collectibles, eBay is now in auto sales and even high-end auctions. In June, it bought Half.com, an online marketplace for used books, music, and videos, for $300 million. Priceline's customers can now bid on hotel rooms, groceries, gasoline, mortgages, telecommunications, and Hertz and Alamo car rentals. Amazon offers auctions, tools and hardware, lawn furniture, electronics, toys, and software in addition to books. And its 4.5 million square feet of new warehouse and distribution space is only 20% occupied. Like priceline and eBay, it's determined to beat the Darwinian squeeze that threatens to render many e-tailing stocks extinct.By Louise WittReturn to top


Steve Ballmer, Power Forward
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus