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SmarterKids.com: A Smart Move?

Yet again, there was another dot-com e-tailer that liquidated yesterday: Garden.com . It seems as if there are two choices for many e-tailers: either liquidate or sell out.

This was a dilemma faced by SmarterKids.com , which decided to do the latter. Here's the background: The company is an online education store focused on kids. Gomez Advisors ranked the site #1 for the educational toy sector. Forrester considers the site to be the easiest-to-use for the Toys and Game category.

But as an independent entity, it was tough for SmarterKids.com. In the past quarter, sales were a mere $1.51 million, which was a 109% increase from the same period a year ago. In all, there were 254,000 customers. Repeat customers accounted for 49% of total revenues in the past quarter. Net losses were $6.4 million.

But in the current Darwinist environment, this was not enough for investors. So, SmarterKids.com decided to merge with Earlychildhood.com yesterday.

Actually, Earlychildhood.com (ECC) is a private company. Through the merger, the company will be able to gain access to the public markets.

ECC was actually founded in 1985. The company is a major seller of education products and supplies. It even has an assortment of proprietary products, such as BioColor (biodegradable paints). The company has a mail list of over 2.5 million and has deals with more than 90,000 early learning centers. Interestingly enough, ECC is owned substantially by William E. Simon and Sons, which is a private equity fund.

Assuming the operations of ECC and SmarterKids.com were combined as of the first nine months of 2000, revenues would have been about $70 million. The cash position would have been about $34 million.

Actually, the new entity is expected to hit EBITDA break-even in 2001. After all, there is much duplication in both enterprises, which means substantial opportunities for cost reductions.

Yet, the fact remains that the toy marketplace is brutally competitive. Even though the new entity will be profitable (or, at least break-even), it probably will face margin pressures. EToys, Toysrus.com (in combination with Amazon.com) and perhaps even Wal-mart.com will likely be daunting. So while the merger will keep SmarterKids.com alive, the fight will still be difficult.