eToys Hitting Bottom

Weaker-than-expected results for the current holiday season, dwindling cash
levels and analyst downgrades ganged up on eToys today, sending the online
toy retailer’s stock plunging to as little as 25 cents in early trading.

Goldman Sachs, which has been hired by eToys to explore merger and
acquisition opportunities, also downgraded the stock to market perform from
outperform. And Robertson Stephens today placed its investment rating and
loss estimates for eToys Inc. on review. It had rated the company a buy.

Meanwhile, the research arm of Goldman Sachs also said that overall online
holiday e-commerce sales for the week ending Dec. 10 were lower than expected
and there exists a “significant risk” that seasonal sales will come in at the
low end of the firm’s estimate of 50 to 100 percent year-over-year growth.

The firm said sales for Week 6 of its holiday season survey showed a 24
percent year-over-year gain, gain vs. the company’s 45 percent estimate. The
figures resulted in a holiday season gain of 115 percent vs. 170 percent as
of the week before.

“We continue to see a significant deterioration in selected e-commerce
companies’ trends, but not in all,” GS said. Exceptions included and

eToys late Friday announced weaker-than-expected results for the current
holiday season and, amid dwindling cash levels, said it will take
“aggressive” measures to continue as a going concern, including the possible
sale of the company.

eToys said it anticipates sales for the quarter ending Dec. 31 of between
$120 million to $130 million, down from the $210 million to $240 million
previously projected.

The company said it believed the revenue shortfall was in large part
attributable to a harsh retail climate driven by concerns over the economy,
the current disfavor of Internet retailing, and a consumer population
meaningfully distracted by the presidential election and its aftermath.

Are there lessons here for other e-tailers? The biggest lesson is that “any
pure play … has challenges that multi channel retailers don’t have, the
obstacles are bigger” said Christine Loeber, program manager for online
retail strategies at market researcher Yankee Group.

“Customers like to have
options … multi channel retailers provide those options … eToys, I can’t
touch it, I can’t feel it, I can’t go into a store to buy it or return it … there’s really a lot of limitations that go along with that avenue of sales.”

eToys in its statement Friday also said that:

  • Operating losses are expected to be between 55 percent and 65 percent of
    revenue, rather than the 22 percent to 28 percent of revenue previously
    estimated (in each case excluding non-cash charges for deferred compensation
    and goodwill amortization and non-cash charges attributable to preferred
    stock). This compares with operating losses of 59 percent of revenue during
    the quarter ended December 31, 1999 (excluding non-cash charges for deferred
    compensation and goodwill amortization and non-cash charges attributable to
    preferred stock).

  • Cash and cash equivalents at December 31 are expected to be between $50
    million and $60 million, rather than the $100 million to $120 million
    previously estimated. This compares with a cash and cash equivalents balance
    of $111.4 million at September 30, 2000.

  • Profitability is no longer estimated by its fiscal year ending March 31,
    2003. Quarterly loss will no longer narrow year-over-year as of the quarter
    ending December 31, 2000, as previously stated.

Goldman, Sachs, in its downgrade notice, said that “Strong performance during
the holidays was required to obtain additional funding to achieve
profitability and those prospects are now diminished.”

“The company

decided in early 2000 to bring fulfillment in-house because of
the poor performance of its fulfillment outsourcing partner last holiday
season,” GS went on to say. “The cost of this large scale infrastructure, and
the need to spread that cost over a large volume of scale, contributed to the
company’s aggressive revenue targets for this holiday season. Unfortunately,
in the current capital constrained environment, the company was unable to
invest sufficient marketing dollars to drive the required revenue levels
commensurate with the infrastructure costs.”

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