Value America, But Not This IPO

America is back. No, I’m not referring to our role as the world’s policeman, I’m talking
about Value America, the online superstore that may go public as early
as tomorrow after canceling its first IPO bid seven months ago.

Unnerved by the suddenly frigid Internet stock market, Value America
withdrew its planned stock offering late last September. It probably was
a good move, even though an IPO from another commerce player, online
auctioneer eBay, debuted on Sept. 24 to tremendous success.

But eBay’s offering was highly anticipated, not only because it ended a
monthlong IPO dry spell, but because it emanated from the rarest of
Internet species – a profitable company.

Value America was a long way from profitable back then, and it’s a long
way from profitable now.

The company certainly has proven it can generate some decent revenues,
racking up $41.5 million in sales in 1998, its first full year of
commercial operations.

And what, exactly, does the Charlottesville, Va.-based company sell?
Seemingly, a lot of everything. Value America’s Web site features
name-brand products in 16 broad categories ranging from computers,
software and electronics to major appliances, furniture and clothing.
Many products are displayed in multimedia format, a service for which
Value America collects a small fee from manufacturers.

Unfortunately, the company is selling this merchandise virtually at cost
in order to build traffic and name brand. Value America’s gross margin
on that $41.5 million was a meager $768,000, or 1.85%. Compare that to
the gross margins of other etailers such as Amazon.com (22%) and CDNow
(20%). Not in the same league.

Further, Value America’s revenue per employee is $182,819, also well
below Amazon.com’s $290,474 and CDNow’s $295,262.

Throw in huge expenditures on sales and marketing, and what this all
adds up to is a $53.6 million loss for Value America in 1998.
Perhaps most disturbing is Value America’s acknowledgement of inadequate
financial and operational systems. In its S-1 registration, the company
says independent auditors a year ago “advised us of a significant
deficiency in our internal control structure resulting from our
inability to determine product shipment dates and order statuses on a
timely basis.”

The company also alludes to problems with customer service and product
returns. In a world where another etailer is a mouse-click away, these
kinds of problems can be the kiss of death.
Value America hopes to raise at least $97.8 million by selling 5 million
shares between $15 and $17 each. Lead underwriter is BancBoston
Robertson Stephens.

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