Buy.Com inc - Weak Holiday Sales Led To Cutbacks And Refocus

As early as mid-2000 some analysts—notably investment banker Goldman, Sachs & Co.; financial magazine Barron's; and the stock market Web site TheStreet.com—thought Buy.com was in danger of running low on capital by the end of the year or in early 2001. Although the company raised its prices slightly at the beginning of the year and reported a positive gross margin of 4.3 percent in the first quarter, it still reported a net loss of $66.4 million for the first half of 2000 on revenue of $400.8 million. Its third quarter net loss amounted to $21.4 million on revenue of $190.2 million. By November Merrill Lynch & Co. issued a warning on Buy.com that the company was funding its operations from a dwindling supply of cash. That was followed by a report in The Orange County Register that Buy.com had enough working capital to last another year, even if it lost $30 million a quarter. The company's stock was trading around $2 a share in late November.

Buy.com had taken steps during 2000 to improve its customer service for the holiday season. In December Forrester Research ranked Buy.com the top etailer in its PowerRankings, which were based on a survey of 20,000 online customers. The rating was based on customer service, low prices, free shipping promotions, and quick e-mail responses. In terms of buyers, PC Magazine ranked Buy.com third among Web retailers for September 2000 with 428,000 buyers, behind Amazon.com and ticketmaster.com. Buy.com had every reason to be optimistic about the 2000 holiday shopping season, but competition from brick-and-mortar retailers and their Web sites reduced Buy.com 's Web traffic by 10.8 percent in the first week of December and by 16.5 percent in the second week, compared to the same weeks of the previous year.

As a result, Buy.com 's fourth quarter revenue was $196.7 million, about $23 million less than estimates. Fully expecting to be in business for the 2001 holiday season, Buy.com announced it would focus on delivering positive operating cash flow by the fourth quarter of 2001. It planned to refocus its resources on its core product categories: computer hardware and software, consumer electronics, wireless products, plus a general clearance category. It closed its sports store in March. Buy.com also planned to focus its efforts on the U.S. market and announced it would discontinue its Canadian store operations effective February 2, 2001. The company's British operations were sold to the John Lewis Partnership in March. Layoffs of 150 employees, together with other cost-cutting measures, were expected to reduce the company's annual operating expenses by $70 million.

Meanwhile, the company entered 2001 with a new management team. Chairman and CEO Gregory Hawkins and chief financial officer (CFO) Mitch Hill resigned in February 2001. Donald Kendall, former chairman and CEO of PepsiCo and a Buy.com board member, was appointed chairman. James Roszak was named interim CEO, and Robert Price joined the firm from PairGain Technologies as CFO.