Don’t Buy Into Turnaround

Back in the spring of 1999, a close friend of mine, a very successful businessman, had been asked to be part of a small group charged with developing a Web site for selling cameras and other optical equipment.

Basically, they were being contracted on speculation by a deep-pocketed Internet company to develop the site, which, when completed, was to be purchased outright by said company for what the group imagined would be the then-typical obscene amount of money.

My friend and his partners were planning their mansions before the first HTML code was written, even though I cautioned at the time that 1) they were probably one of about 10 groups asked by the company to do the same exact thing (nothing like free Web development teams!), and 2) the company in question, , was a huge money-loser whose founder had serious run-ins with the Securities and Exchange Commission just three years before. In other words, there hardly were any guarantees here.

These warnings were breezily dismissed. “One of the guys we’re working with is the brother-in-law of a board member,” my friend assured. “It’s a done deal!”

Needless to say, the “done deal” fizzled in typical fashion. After months of no communication, one member of the group called, only to be informed, “Oh, we decided awhile ago not to buy a camera site. Didn’t anyone tell you?”

I always think of this anecdote when I hear or read about, especially since the news is almost always bad. The latest came Tuesday, when the company announced CEO Gregory Hawkins and CFO Mitch Hill had resigned and been replaced by two board members. (Neither of which is the brother-in-law mentioned above.) Hawkins had succeeded founder Scott Blum in March 1999.

The market responded positively, sending BUYX shares up 11% to $0.63, but the elation is premature. This is a desperation move that probably comes too late for a company that has been losing too much money for too long. Of course, that’s what happens when the bedrock of your strategy has been to sell all of your many products below cost in order to build traffic to your sites, with profits coming from advertising revenue.

Even back in 1999, when nearly every Internet business model seemed defensible (at least in theory), there were serious reservations about’s negative-margin gambit. However, insisted it would fuel the rapid growth necessary for the company to achieve its goal of becoming the next certainly has become a huge revenue generator, with $787.7 million in sales in 2000. Among pure e-tailers, only ($2.76 billion) had more. But BUYX’s quarterly sales have been flat for a year now: Q4’s revenue of $197 million is less than the $201 million in the year-ago quarter, and barely above Q3 sales of $190 million (which in itself is a disaster).

While losses also are down, they still run deep. Net loss in Q4 was $36 million, or 27 cents per share, compared to a loss of $49.6 million or 54 cents per share, in the year-ago quarter. For the entire year, BUYX lost $98 million, or 76 cents per share. has been gradually raising its margins since 1999, and two weeks ago said it would increase them even more by focusing on “core categories” such as computers, software and consumer electronics, while still selling books, videos and games. As a result, the company forecasts 2001 sales of between only $580 million to $600 million, but says it has set a goal for cash-profitability by the fourth quarter.

Part of that plan includes layoffs, the sale of its U.K. Web site, the shutting down of its Canadian site and reduced spending on marketing. Given the company’s precarious cash position – $56.7 million as of Dec. 31, along with another $10.8 million in marketable securities – expect more severe cost-cutting measures.

The naming of board member and former PepsiCo CEO Donald

Kendall as chairman and the appointment of board member James Roszak – a former Transamerica division president – as interim CEO is designed to restore investor confidence that become profitable. While I wish them well in their mission, my advice to investors is the same as my advice to my friend two years ago: Believe it when you see it.

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