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Value America, But Not This IPO

America is back. No, I'm not referring to our role as the world's policeman, I'm talking about Value America, the online superstore that may go public as early as tomorrow after canceling its first IPO bid seven months ago.

Unnerved by the suddenly frigid Internet stock market, Value America withdrew its planned stock offering late last September. It probably was a good move, even though an IPO from another commerce player, online auctioneer eBay, debuted on Sept. 24 to tremendous success.

But eBay's offering was highly anticipated, not only because it ended a monthlong IPO dry spell, but because it emanated from the rarest of Internet species - a profitable company.

Value America was a long way from profitable back then, and it's a long way from profitable now.

The company certainly has proven it can generate some decent revenues, racking up $41.5 million in sales in 1998, its first full year of commercial operations.

And what, exactly, does the Charlottesville, Va.-based company sell? Seemingly, a lot of everything. Value America's Web site features name-brand products in 16 broad categories ranging from computers, software and electronics to major appliances, furniture and clothing. Many products are displayed in multimedia format, a service for which Value America collects a small fee from manufacturers.

Unfortunately, the company is selling this merchandise virtually at cost in order to build traffic and name brand. Value America's gross margin on that $41.5 million was a meager $768,000, or 1.85%. Compare that to the gross margins of other etailers such as Amazon.com (22%) and CDNow (20%). Not in the same league.

Further, Value America's revenue per employee is $182,819, also well below Amazon.com's $290,474 and CDNow's $295,262.

Throw in huge expenditures on sales and marketing, and what this all adds up to is a $53.6 million loss for Value America in 1998. Perhaps most disturbing is Value America's acknowledgement of inadequate financial and operational systems. In its S-1 registration, the company says independent auditors a year ago "advised us of a significant deficiency in our internal control structure resulting from our inability to determine product shipment dates and order statuses on a timely basis."

The company also alludes to problems with customer service and product returns. In a world where another etailer is a mouse-click away, these kinds of problems can be the kiss of death. Value America hopes to raise at least $97.8 million by selling 5 million shares between $15 and $17 each. Lead underwriter is BancBoston Robertson Stephens.



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