eToys Plans New Product Categories, Anticipates Profit

Children’s product retailer eToys Inc., which said Wednesday that it expects gross profits to exceed expenses in fiscal 2001, is extending its reach by adding party goods and hobby categories to its existing offerings for the holiday season.

eToys (ETYS) announced the growth initiatives at a business conference in New York City. The company said the new offerings should launch in 2000 and it is exploring additional commerce categories for 20001. eToys already offers seven children’s product categories: toys, books, software, music, videos, video games and baby products. The company will also add two content channels focused on topics of interest to parents and children.

Toby Lenk, president and chief executive officer of eToys, said the new content and commerce initiatives further eToys’ mission to become the premier family-oriented site on the Internet.

At the conference, the company also provided a detailed analysis of its marketing and sales expenses in fiscal 1999, as well as its plans for reducing expenses as a percentage of net sales in the future.

eToys reported $120 million in marketing and sales expenses last week in its fiscal year-end results. The company said advertising made up $56 million, or 37 percent, of its $151 million in net sales. The company said it expects advertising expenses to decrease significantly as a percentage of net sales in fiscal 2000. Customer acquisition costs are also expected to decrease.

eToys also reported that fulfillment, customer service and credit card fees were $50 million, or 33 percent of net sales for fiscal 1999. eToys expects those expenses will decline significantly as a percentage of net sales in fiscal 2000 and will not exceed the company’s gross profits for the fiscal year. This will be achieved through increased productivity arising from greater automation and operating experience in fulfilling customer orders, and through higher utilization of its distribution centers as revenues increase and seasonality decreases, the company said. eToys is also anticipating improvements to gross profit margin through changes in product mix (including higher-margin private-label products), additional non-fulfillment revenues such as sponsorship fees, improved purchasing terms with higher volume purchasing and reduced shipping costs as a result of the company’s bi-coastal distribution centers.

Other marketing and sales expense, which includes personnel and general overhead, was $14 million, or 9 percent of net sales in fiscal 1999.

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