[Marketwatch] eToys: Rise and Fall of a Superstar

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From: Adam Rifkin (adam@KnowNow.com)
Date: Tue Dec 19 2000 - 00:25:05 PST


eToys fell 72% today after being down 97% from its high. Its market cap
is down to $37 million. Ouch.

Nice of Goldman Sachs to downgrade the company it took public from
"market outperform" to "market perform". It ended the day at 28 cents a
share, how is this market perform? I do remember that last year at one
point Goldman upgraded eToys when it was at sixty bucks a share. And
now? Dying quickly... average daily volume for ETYS is 4 million;
today 46 million shares exchanged hands.

    http://cbs.marketwatch.com/archive/20001218/news/current/etys.htx

EToys: Rise and fall of a superstar
By Deborah Adamson, CBS.MarketWatch.com
Last Update: 4:14 PM ET Dec 18, 2000

LOS ANGELES (CBS.MW) - EToys on Monday became the poster child of the
instant but fleeting stardom plaguing Internet retailers, as the company
sent out an S.O.S for more cash to stay in business.

EToys, a Wall Street darling a year ago with its stock sailing to its
high of $86 a share, is the highest profile dot-com yet to run parallel
to the boom-and-bust destiny of online retailers that included such
popular sites as Pets.com and Buy.com.

The third-quarter sales shortfall that EToys (ETYS: news, msgs)
announced on Friday went well beyond the recent spate of quarterly
warnings by other retailers as EToys also said that to be viable through
next year, it needs more cash three months sooner than expected. See
full story.

In another sell-off of the stock on Monday, investors bid the stock down
to a mere 28 cents a share, losing 75 cents for the day.

EToys' financial game plan hinged on a much higher level of sales,
analysts said. With top lines faltering, the rest has unraveled.

The company cited the effects of the weakening U.S. economy, stiff
competition, current disfavor of Net retail sales and distractions
because of the election controversy.

Surprising severity of warning

Melissa Williams, an analyst at Gerard Klauer Mattison, said she was
surprised by the magnitude of EToys' warning.

The analyst maintained her "neutral" rating on the stock but cut the
loss estimates. However, at this point when EToys' own future is
questionable, "I don't know if it matters," she said.

Lauren Cooks Levitan, an analyst at Robertson Stephens, suspended her
ratings and estimates for EToys. In a research note, she commented that
the "worst case scenario plays out" for the e-tailer in which both cash
and time are running out.

EToys had a "stunning" lack of consumer demand, despite building an
enviable order fulfillment and customer service operation, Levitan
wrote. Moreover, the alliance of Amazon.com (AMZN: news, msgs) and Toys
'R' Us (TOY: news, msgs) -- the Net's most successful retailer and the
world's largest toy chain - damaged EToys with its free shipping offer
on orders of $100 and up, Levitan said.

EToy's sales now are expected to be between $120 million and $130
million for the quarter - far off the $210 million to $240 million the
Los Angeles company previously projected. Its operating loss would be 55
to 65 percent of sales, vs. the earlier estimate of 22 to 28 percent.

Novelty wears thin

Kurt Barnard, president of Barnard's Retail Trend Report and an old
retail-industry hand, said e-tailers overestimated their appeal and
viability. Initially, they generated much excitement by their sheer
novelty. But when old-economy retailers started catching up by offering
shopping on their own Web sites, e-tail rivals faltered.

After all, Barnard argued, given a choice, consumers would rather buy
from an established retailer online such as Wal-Mart instead of an
Internet company without much financial history and deep pockets. Also,
shoppers may prefer buying from established retailers' Web sites because
it's more convenient for them to return merchandise at the nearest store.

Compounding the problem, online retailers faced gargantuan costs in
everything from creating online ordering and distribution systems to
building an attractive brand name. These two challenges aren't as
problematic for established retailers, which have the money and
recognition to push forward a successful online front.

Barnard says the Internet's true role in retailing is as a marketing
channel to supplement real stores. As such, pure plays such as EToys
would have a hard time prospering.

"If they only had thought things through carefully," he said.

Media coverage

It's also possible that EToys' decline was helped along by a kind of
self-fulfilling prophecy in the media coverage emphasizing the company's
troubled prospects, according to the report by Robertson Stephens' Levitan.

Williams, the Gerard Klauer Mattison analyst, said the seasonality of
EToys' sales - with the majority coming during the Christmas holidays -
was a big hurdle. EToys needed to generate a lot of sales to support the
level of expenses it carried. Seasonal sales, where the fourth quarter
would make or break the year's performance, made it difficult.

In Levitan's view, all of EToys' problems have been "quite devastating
and substantially outweighed compelling evidence that EToys is
delivering a consumer experience among the best of all Internet
retailers this holiday season."

----
Adam@KnowNow.Com

What you know you can't explain, but you feel it. You've felt it your entire life, that there's something wrong with the world. You don't know what it is, but it's there, like a splinter in your mind, driving you mad. -- The Matrix


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