End Of The Road For eToys

Two years ago, eToys shocked the embryonic e-tail world by emerging as the leading online seller of toys and games.

Last year, as the holiday shopping season loomed, it was seen as the Internet toy site to beat, despite facing potentially formidable competition from bricks-and-mortar retailers such as Toys ‘R’ Us and Wal-Mart, each of which stumbled out of the blocks in the race for cyberspace supremacy.

So confident were investors in this emerging sector heavyweight that shares soared even before last fall’s run-up of ‘Net stocks began. From Aug. 9 to Oct. 11, 1999, ETYS nearly tripled in price to $84.25.

It’s been all downhill from there. While eToys last season once again led all online toy merchants in traffic and sales, its image was seriously tarnished by customer complaints about order fulfillment and late deliveries. No more so than other e-tailers, to be fair, but eToys’ (and the media) had positioned itself as being a cut above those other slow-footed toy e-tailers.

Now, in the wake of a stunning, one-year stock price collapse, mounting losses and dwindling cash are about to force eToys out of business. With shares struggling to stay above $1, the company announced last week that sales for this quarter – seen for months as eToys’ last chance – will be between $120 million and $130 million, disastrously below previous projections of $210 million and $240 million. Revenue in last year’s Q4 were $107 million.

eToys has retained Goldman Sachs to “explore strategic alternatives,” the Wall Street euphemism for a fire sale.

What went wrong for eToys? In many ways, the story begins and ends with red ink. Even when it was a Wall Street darling, eToys was a huge money drain. In its fiscal year ended March 31, ETYS reported a net loss of $190 million. This was due primarily to eToys’ aggressive “first-mover” strategy that called for it to capture the online toy market mindshare before competitors – both online-only and bricks-and-mortar – got their acts together.

That blitzkrieg strategy may be viable when investors are supportive. But when the market goes south, as it did this year, size beats speed. And as nimble as eToys was, it couldn’t win a war of attrition against retail giants such as Toys ‘R’ Us or Wal-Mart.