EToys Still Good For Holiday Flight

Three months ago, shareholders of online retailer eToys (ETYS)
were looking ahead to the holiday season like a bunch of kids waiting to
hear hoof steps on their snow-covered roofs.

Now many are worried that Santa will pass them by altogether. ETYS
shares are still trying to recover from a double blow delivered late
last month. First, after announcing Oct. 28 that the company had met
(but not blown away) analysts’ projections in the recent quarter, eToys
executives warned of higher marketing costs this quarter.

A day later, Goldman Sachs, the lead underwriter for eToys’ May IPO,
said it would release lock-up restrictions on 9.5 million shares of ETYS
on Nov. 2, with the remaining shares under lock-up to be free on and
after Nov. 16.

This prompted a sell-off that saw shares fall from 70 5/8 to 50 3/8 in
three trading days, a 29 percent plunge.

The good news for eToys investors is that the stock appears to have
stabilized. ETYS was trading Wednesday afternoon at 53 3/16, or nearly
6 percent above its Nov. 2 close. That’s also roughly halfway between the Oct.
11 closing high of 84 < and the Aug. 9 closing low of 30.

Further, the market appears to have absorbed the additional shares from
the lock-up without further consequence. What had been a float — the
amount of stock issued to the public — of 8.3 million shares is now
41.9 million shares.

With earnings season behind us, investors will be focusing on holiday
sales performance, and here there is nothing new: eToys was, and still
is, expected to be on the short list of winners this season.

Granted, the company has attracted some powerful competitors that it
didn’t have last year when it was the top toys e-tailer in the holiday
season, raking in $22.9 million in the quarter ended Dec. 31. (AMZN)
Toys ‘R’ Us, Wal-Mart, and others are fighting to dominate
the online toys market, which Forrester Research estimates will reach
$1.5 billion by 2003.

Indeed, the intensity of the competition is illustrated in a
Nielsen/NetRatings survey released Tuesday which shows eToys,
and Toys ‘R’ Us — the top three toy sites — all more than doubling Web
site traffic in October.

That extra marketing money that so troubled investors last month will
come in handy in the holiday stretch run as eToys tries to maintain its
lead in a crowded field. It has some powerful assets at its disposal,
including a $20 million marketing deal with AOL and a cross-promotional
campaign with The Gap.
EToys also has strong brand recognition to leverage as the gift-giving
season intensifies.

In the end, I believe eToys shareholders still have something to lookforward to in the coming weeks.

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